Cash flow is one of the most important key performance indicators (KPIs) for virtually any business. It needs to be tracked carefully to ensure your outgoings are paid out punctually, to keep up with payroll and to ensure you are taking payment from customers promptly.
Cash flow relates to all money moving in and out of the business. You find it in operations as well as the financing and investing portions of the business. In operations, cash activities revolve around net income. In investing, it relates to all non-current assets, and in the world of financing, it relates to both non-current liabilities and owner’s equity.
Altogether, cash flow is a measure of the overall transfer of cash and assets of your business. It determines all the money generated and spent by your business over a certain period of time. Cash flow can be positive or negative.
- Positive Cash Flow: This is when your cash flow statement shows a net balance that is greater than zero. It means your business has sufficient working capital to cover all bills – in essence, the business is liquid.
- Negative Cash Flow: This is when a business spends more than it generates over a given time period. When no cash remains after expenses, the business has negative free cash flow.
10 Ways To Improve Cash Flow In Your Business
1. Get Deposits For Large Orders
Getting deposits for your orders can be a powerful way to improve cash flow. It may not be possible on all accounts, in which case you can focus it on larger orders. This will ensure there is money in your account, removing worries about covering payroll and other expenses. Upfront payments, in part or full, should definitely be considered for improving cash flow.
2. Send Invoices Out Promptly
Many businesses have no system for processing invoices. Pen-and-paper methods, or spreadsheets and emails, can be hard to track, especially if you are sending out multiple invoices daily. Moreover, customers often leave it until the deadline to pay an invoice. All this can lead to cash flow problems in your business.
A good solution is to use software that automatically creates and sends invoices. Software like NetSuite can handle this for you with advanced automation tools. This will give you the reassurance that invoices are being sent and monitored at all times.
3. Track Due Dates and Forecast Sales
You should be conducting weekly, fortnightly or monthly analysis and reporting. This helps identify problems early on so that you can tackle them. Tracking data not only helps you identify anomalies; it also helps in keeping collections above expenses and liabilities. This is key to managing a positive cash flow.
Track due dates and forecast sales against liabilities to stay in the black with cash flow. The reporting tools available in software like NetSuite are once again useful for this.
4. Offer Flexible Payment Options
Flexible payment options can be helpful in improving cash flow. You can offer options like cash, online payments, cheque, direct debits and more. If you only offer a single payment option, it may be difficult for some customers to pay using that method (particularly for cheques or cash payments).
Customers are likely to have their preferred methods of making payments. Therefore, the more payment options you offer, the more likely it is that you will consistently receive payments on time. This will improve the cash flow of your business.
5. Use Credit Terms When You Have To Buy
Making use of credit or payment terms can help improve business cash flow. These arrangements break down payments into instalments so that you keep cash flow available for other expenditures. Where this is not available, a business credit card can be a good alternative.
When you use these options, you become more resilient against a phase of cash crunch. If you have no cash flow available and a cash crunch crisis materialises, you may have to take out a loan or find other ways to make payments. This would be detrimental to the health and revenue of your business. Thus, credit terms are a useful resource when you have to buy.
6. Lease First, Buy Later
Liquidity is important when managing cash flow. One option to consider is to lease out new business assets/technologies instead of buying outright. This means you pay certain amounts of money over a period of time for something that you are using to generate income.
For example, you can take advantage of Software-as-a-Service (SaaS) models to access powerful business tools like NetSuite or Sage 200 without having to actually buy them. You can then utilise those tools to help improve your cash flow before making a decision about investing in new infrastructure and assets. Remember that fixed assets can always be a problem for cash flow in your business.
7. Experiment With Your Selling Prices
Finding the right selling prices for your products is massively important. You can explore the elasticity of your customers with regard to prices to access potential upturns for your cash flow. Prices can be marked up or down, studying fluctuations in demand for your product as you go. Marking up can boost revenue if it doesn’t cause sales to drop, but marking down can do the same if it causes sales to increase.
8. Look For a Purchasing Cooperative
Purchasing cooperatives are where groups of businesses in the same niche work together to acquire goods or services in bulk to save money. Subsequently, each business becomes more able to provide quality products at good prices, and your market power increases.
9. Invoice Factoring
Some companies will buy your invoices at a discounted rate. In exchange for this, they will pay the remaining balance immediately, increasing liquidity in your hands and thus improving cash flow. Those companies go on to collect the due amount in full from your customers.
This is invoice factoring, and it can be a useful resource if you find the right service for your business. Doing so could lead to a swift cash influx when you need it.
10. Reducing Process Costs
You should always be looking for opportunities to cut down on costs associated with business processes. Compare suppliers and service providers for the best prices and look for discounts where available. You should also be aware of late fees and other penalties.
Workflow automation tools in software like NetSuite can make it easier to minimise process costs. You can set maximum thresholds that, when crossed, cause the system to notify you so that you can start looking at ways to cut down. All of this can lead to improved cash flow.
Other Methods To Improve Business Cash Flow
- Seek expert advice and consultancy.
- Switch direct debits from annual/quarterly to monthly where possible.
- Keep track of customer payment cycles and offer incentives for swift payment.
- Review inventory and liquidate and discontinue products that are not selling well.
- Investing in training and upskilling your staff to improve their skills and productivity.
- Performing credit checks on clients before contracts are signed to ensure they are trustworthy.
- Look for cost savings in other areas such as reducing energy bills.
All the ideas listed above could have a positive impact on your cash flow. Leave no stone unturned in the pursuit of improving this fundamental KPI and the benefits will be felt throughout your business.
Why choose Eventura to deliver your accounting/ERP solution?
Eventura has been providing robust business and accounting solutions to countless organisations for over two decades. We are ERP experts and can identify all of your business needs, and deliver a comprehensive ERP solution that works to make accounting and daily business processes more efficient.
As Sage 200 Partners and NetSuite Solution Providers, we can help you identify which solution will fit your business needs the best. Our expert team of business analysts, developers, consultants, technicians and support staff can guide you through your entire project, from initial scoping through to implementation and on-going support.
We’re also managed IT service providers meaning we can help you identify your entire IT infrastructure requirements from day one. If you would like to speak to one of our ERP experts to discuss your options or request a free demo, you can request a free call back here.