In today’s unsteady business environment, cash flow difficulties will become a common challenge for many small and large businesses. Even a very profitable business can face extreme cash flow problems.
There are several things that can improve company cash flow, which are detailed below:
What is Cash Flow?
Cash flow is the term used to describe the amount of available cash within a business. Tight cash flow usually means that there is not sufficient available cash to meet current financial obligations. Whereas a healthy cash flow means that there is sufficient available cash to meet current financial obligations.
Why is Cash Flow Important?
In business, CASH IS KING. No matter how profitable a company may be, if there is not enough available cash, the company could cease to trade.
Cash is needed in a business for several reasons. These include…
- To pay for salaries and overheads
- To pay liabilities such as suppliers and bank loans
- To pay owners their share of company profits
- To invest in assets, business growth, research and development
If there is not sufficient cash within a business, it will not be able to meet its financial obligations. This can result in a business defaulting on payments it owes and closing down.
How to Improve Cash Flow
There are several ways that a business can improve cash flow, and they all start with identifying the cause of the cash flow crisis. It may sound obvious, but many businesses experiencing cash flow problems don’t actually know why. You cannot solve a problem without knowing what the problem is.
Creating a cash flow statement and forecast is a fantastic way to identify where cash is going and how much available cash is in the company (if any). A well created cash flow statement will show all cash in and out of the bank account(s) and pinpoint what is causing the company cash flow problems.
Sometimes the answer to solving negative cash flow is not a single solution – the answer can involve all round improvement of all cash extracting areas of a business.
Cash Flow Statement – shows what cash has come in and gone out of the business historically. Cash flow statements typically cover a period of a few months to a few years.
Cash Flow Forecast – shows what cash will likely come in and go out of the business. The forecast is used to project all future cash transactions. Cash flow forecasts typically cover a period of a few months to a few years.
One of the most common areas to improving cash flow is to reduce debt outstanding by customers to the company (debtors). This is usually done by reducing the time it takes for debtors to pay their bills. Here are some quick tips to help improve debtor payment days:
- Credit checks – doing credit checks and approving all customer accounts before offering credit can result in less bad debts and better paying customers.
- Set credit limits – setting credit limits often results in customers having to pay the business to continue trading (if the credit limit has been reached) and can avoid large bad debts. A win-win for the business.
- Do credit control – chasing customers for payments is one of the best ways to get paid on time. This can include reminding customers by email, post and phone. The best credit controllers can build strong relationships with clients but are also able to request payment.
- Agree better payments terms – Agreeing payment terms is a must. Agreeing tighter payment terms can really help company cash flow.
- Invoicing quicker – the quicker invoices are raised and sent to customers, the quicker you should get paid. Don’t let invoices take a week to be raised, that is a week without payment!
Just as cash flow can be improved by making positive changes with debtors, cash flow improvements can also be made with creditors:
- Agree better payment terms – having longer payment days with suppliers will improve company cash flow. Negotiating better payment terms is a great exercise, especially with high turnover suppliers – they want your business and could be willing to be more flexible.
- Debtors vs creditors – having higher credit limits and longer payment terms with creditors compared to debtors is a recipe for success. The opposite can be a recipe for disaster.
- Request higher credit limits – negotiating higher credit limits with suppliers may not be the best risk averse decision but it can be a good decision for improving cash flow health.
Too many new and growing businesses do not plan sufficiently. All businesses should have a business plan, which includes projected financials, goals and expected cash needs. When businesses do not have a business plan, they can often purchase too much stock. Simply have a business plan when starting or growing a business – simple!
Also, reviewing production efficiency – a review of your production, stock and storage costs is a healthy exercise for any large business. Some businesses are so serious about stock and production waste that stock and production figures are reviewed on a daily basis.
Some businesses have multiple loans and financing sources. Refinancing loans, mortgages and overdrafts (especially if there has been a rate cut) can help to boost positive cash flow. This is mainly due to 2 reasons:
- Agreeing lower interest rates and reduce finance costs, which can improve business profitability and cash flow
- Agreeing smaller repayments may increase the length of financing and cost more interest but reducing loan repayments can be a cash flow live safer
Director Salaries and Shareholder Dividends
This is the tricky one, especially if you are an employee, but some businesses simply struggle for cash because directors and shareholders take too much cash out of the business. Just because there is a float in the bank account or an amount in retained earnings, does not mean that cash should be withdrawn. Any director or shareholder who understands cash flow will keep a decent investment in the company at all times.
Review Sales and Expenditure
A general review of sales and expenses is a great way to improve cash flow. Having more sales is great for any business financials. Sometimes, making more money is not the answer though. Sometimes saving more money is the answer to improving your cash flow troubles.