How can a business improve its cash flow

A healthy business has a healthy cash flow. In times of economic downturn, it’s more important than ever to know how much money is coming into your business and how much is going out.

If your business is struggling financially, then improving business cash flow is one of the most important steps you can take. This could mean encouraging clients to pay for services on time, developing accurate cash flow forecasts and diversifying income streams.

In this article, the expert team at Irwin Insolvency explains what cash flow in business is, before exploring the options you can take to improve your cash flow.

What Do We Mean By Cash Flow?

Cash flow in businessBusiness cash flow refers to the amount of money moving into and out of a company’s accounts. This includes all of the revenue and income being generated by the business (the money coming in) which is often referred to as an ‘inflow’. It also includes all of the company’s expenses (the money going out), which is commonly called ‘outflow’.

Learning how to calculate cash flow in business is an important element of financial reporting, and responsible business owners will need to regularly calculate and assess the money coming in and going out of their accounts.

The simplest formula for calculating cash flow involves subtracting total inflows from outflows:

Net cash flow = total cash inflows – total cash outflows

Using this basic formula, you’ll arrive at a figure that’s either positive or negative. These are the two basic forms of cash flow that a business can have.

Positive Cash Flow

A positive cash flow indicates that the business has a healthy cash flow. More money is being generated as revenue than is being spent on expenses. This means that a business will be able to cover its payroll, pay its suppliers and save money for future investments.

Negative Cash Flow

A negative cash flow indicates that the business may not have enough cash to pay its bills when they come due. There is more money going out of the accounts than the business is able to generate, which means they may struggle to pay staff and meet repayment schedules.

What Is a Cash Flow Statement?

While you can calculate whether your business currently has a negative or positive cash flow at any single point in the financial year, it’s more useful to calculate cash flow over a given period of time.

For example, you may have one bad month when sales are down, while the next month revenue rebounds. In the first month, your cash flow may be negative, but over the course of those two months, your business cash flow may be positive.

For this reason, accountants often generate a cash flow statement at the end of certain accounting periods. This could be at the end of each month, financial quarter or financial year. A cash flow statement allows you to calculate and visualise this important business metric and provides a way for you to analyse your revenue streams and expenses.

Cash flow statements are typically more nuanced than the basic net cash flow calculation above. They typically include a breakdown of operating cash flow, investing cash flow and financing cash flow, all three of which greatly contribute to a company’s overall financial health and income streams. Understanding where your cash is coming from and where it’s going, may help answer the question: ‘how can a business improve its cash flow?’

A cash flow statement may include the following important elements:

  • Operating cash flow: A measure of how much cash is created by business operations, such as sales or service provisions. Also includes the amount of cash lost through business expenses.
  • Investing cash flow: Measures the cash coming in and going out from long-term investments, such as property investments, mergers and acquisitions.
  • Financing cash flow: Covers cash flow elements such as paying dividends to shareholders and securing finance from banks.

A cash flow statement would ordinarily detail operating, investing and financing cash flow. The overall cash flow figure for a business is a measure of all three of these figures added together.

How Can a Small Business Recover From Negative Cash Flow?

How can a business improve its cash flowIf your business has a negative cash flow, this is a vital indicator that the company could begin facing serious financial problems in the near future. Negative cash flow could result from low turnover, poor sales, a lack of financial planning and many more reasons, so it’s important to identify the cause of your financial troubles and implement immediate plans to ignite a recovery.

So, how can a business improve its cash flow? There are several methods a business can implement, including encouraging clients to pay for services on time, developing accurate cash flow forecasts and diversifying income streams.

Here are the most important steps your business can take to escape negative cash flow:

  1. Regular Cash Flow Forecasting

Calculating and analysing cash flow in business is the first step towards recovering from a negative cash flow. After all, unless you’re on top of your company’s finances, you won’t know how to turn things around. This means that one of the most important steps you can take is to regularly forecast your cash flow, a step that will provide you with invaluable data when deciding how to improve your financial operations going forwards.

  1. Plan for Economic Slumps and Market Changes

It’s difficult to predict exactly what’s going to happen to your business, but you can predict that at some point in time, there will be economic downturns and challenges to overcome (Brexit and Covid-19 being two of the most recent examples). It’s helpful for business owners to plan for these economic downturns and market changes. You may wish to build up a savings fund to help your cash flow or have contingency plans in place to source new investments or launch new income streams at short notice.

  1. Track and Chase Late Payments

If your business is suffering from negative cash flow, you may have outstanding payments that need chasing immediately. Negative cash flow often results from late or incomplete payments by customers, so it’s helpful if you can track invoices and follow up when payments are overdue.

  1. Offer Discounts for Early Payment

In addition to tracking and chasing late payments, it’s often beneficial to actively encourage customers to pay early. You can do this by providing incentives for early payment, such as a rewards scheme or discounts. This ensures that your cash flow remains consistent, while your customers are more likely to continue paying early in the future.

  1. Take Stock of Your Inventory

Negative cash flow may result from overstocking your inventory. While it’s always helpful to have more stock than you need, it’s not always financially viable. It may be beneficial to order less stock if you’re struggling to sell it. If you need to free up cash it could also be necessary to sell the stock off at a discount price to regain a positive cash flow.

  1. Diversify Your Income Streams

The best way to improve your cash flow is to have more money coming into your bank account. However, it’s not always as simple as just charging more for products or trying to cut down on overheads. You may need to diversify your income streams by selling new products, offering different services or entering into new markets. Ultimately, diverse income streams offer improved protection against negative cash flow in the long run. Lose one income stream, and you have others to fall back on.

  1. Improve Your Accounting Operations

Business owners have to understand their finances if they want to escape negative cash flow and turn a profit. An effective accounting system is vital to positive cash flow, so it’s important to invest in accounting software and systems that help you track your finances. If you’re struggling to keep track of your finances, then you may need to outsource the work to a professional or seek the impartial advice of an insolvency practitioner.

  1. Restructure the Company

Irregular slumps in cash flow might not be much to worry about, but if the business is struggling to maintain a positive cash flow in the long term you may need to consider restructuring. Your business may need to streamline its operations, consolidate different departments and cut down on its expenses in order to reverse its negative cash flow. This sounds drastic, but restructuring could turn your business around and improve its profitability in the long run.

Is Good Cash Flow Management the Key to Survival in Business?

Good cash flow management is always the key to business survival and business success. Cash flow provides an accurate measure of a company’s success, because without any cash, it’s almost impossible to become profitable.

But what is good cash flow management? Good cash flow management involves keeping on top of your finances, regularly undertaking forecasts and chasing clients for overdue payments.

Learning how to manage cash flow in business is an important step towards becoming profitable, so it’s useful to understand what the benefits of good cash flow management are. The major advantages of good cash flow management include:

  • Keeping track of unpaid clients
  • Keeping track of expenses
  • Being paid on time
  • Accurately forecasting cash flow in the future
  • Ability to plan for cash shortfalls
  • Capacity to invest excess cash into the business
  • Knowing when to source new investment or diversify income streams

Essentially, without an effective cash flow management strategy – including effective ways to track and forecast incoming payments and business expenditure – your company may struggle to compete. For this reason, it’s essential that cash flow management is prioritised as an accounting operation in all businesses.

Why Is Cash Management Important to a Small Business?

Whether you’re self-employed, run a small local business with just a few part-time employees or are the CEO of a multinational corporation, cash management is important at all levels of business.

However, large businesses have the capacity to endure prolonged periods of negative cash flow in a way that’s just not feasible for small businesses. For example, larger businesses often have more funding, investment, access to cheap loans, and more in-house expertise than small businesses.

This means that for small businesses, cash management is vital. Staying on top of your cash flow allows you to keep track of your company’s financial health, ensure you’re paid on time and avoid having to secure new sources of finance while racking up increased interest payments from one month to the next.

What Are Some Hacks for Improving Cash Flow?

Business cash flowSmall and medium-sized businesses don’t necessarily have the funding or in-house expertise to manage their cash flow as effectively as larger businesses. After all, setting up a dedicated accounting department is an expensive investment.

However, improving your cash flow helps to improve the long-term viability of your business, and there are a number of useful hacks that can help you out. Different hacks you could take advantage of include:

  • Outsourcing finance and accounting work to contractors, agencies or freelancers
  • Undertaking a monthly cash flow audit to analyse business performance over time
  • Involving your customers by offering discounts for upfront or early payments
  • Using online accounting software and payment trackers to automatically track and chase payments
  • Starting to save up an emergency cash flow backup fund
  • Taking advantage of low-interest cash flow loans for small business and government-backed schemes aimed at helping small businesses

How Can Irwin Insolvency Help Your Business Cash Flow?

If your business is struggling financially, then Irwin Insolvency’s expert team is here to help. Our experienced insolvency practitioners can provide you with the impartial advice necessary to evaluate and improve your business cash flow.

Our team regularly provides financial advice to small, medium and large businesses in a variety of industries and sectors across the United Kingdom. We can recommend cash flow loans for small business, provide business growth advice to company directors and implement business turnaround plans if your cash flow is negative.

Contact Irwin Insolvency today to find out how we can help you.

Contact Irwin Insolvency today for your free consultation

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About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency,
 rescue and turnaround.