Accounting

Cash Flow Management: The Basics for Your Business

Read Time: 6 min

To succeed in business, cash flow management needs to be a priority. Having a handle on this will enable you to stay within your means, avoid credit troubles, pay back business loans, and make payroll. By learning the basics of cash flow management, you can reduce debt and avoid bankruptcy. Read on to learn more about managing cash flow and how to set up a cash flow spreadsheet.

What Exactly is Cash Flow?

Cash flow itself represents the overall fluctuations of incoming and outgoing funds. Therefore, cash flow can be described as the amount of cash that goes into and out of a business. This includes what you receive and what you pay out. In any sales-driven business, cash flow is closely related to the cash conversion cycle, or how long it takes to turn sales into a profit. Understanding this cycle will help you assess your business’s overall financial health.

Cash Flow Basics

To assess your business’s cash flow, you must review your opening balance and your closing balance on your cash flow statement (CFS). The opening balance represents the cash balance at the beginning of an accounting period. The closing balance denotes the cash balance at the end of the period.

Think of cash flow as the lifeblood that enables your business to survive. A business may be able to get by with emergency life support, like a loan, but only for a short time. To continue operations and keep growing, a company needs to create a steady stream of income. Therefore, a business uses cash flow to support its operations, financing, and investments.

So, how is this best accomplished? By making more money than you spend. But, contrary to what some people believe, cash flow does not represent profit. Conversely, cash flow management takes time and energy to nail down.

business cash flow

Profit vs. cash flow

Profit only refers to the money remaining after paying expenses. Cash flow, on the other hand, shows the net flow of money coming in and out of a business.

Basically, your company’s profit shows how much you have earned in net income for an accounting period. Cash flow from operating activities measures how much cash comes in and out of your business daily. When used as a metric for operations, cash flow gives you a clearer insight into where to reduce spending. Therefore, net income represents the starting point for figuring cash flow from operations.

Positive vs. negative cash flow

To function as a business, you need to realize a positive cash flow. A positive cash flow results when your closing balance surpasses your opening balance during an accounting period. The opening balance translates to a company’s available cash. In this case, the cash inflow exceeds the cash outflow on your cash flow statement (CFS).

A negative cash flow happens when the closing balance is less than the opening balance. This means you’re losing money and need to reduce your cash output or increase input to remain afloat.

Why Cash Flow Management is Essential to Your Business

Remember, if a business runs out of cash, it cannot survive. That’s why it’s important to prioritize cash flow management.

You can get acquainted with the process of cash flow management by referring to your cash flow statement (CFS), or your cash flow spreadsheet. The CFS allows you to assess how well your business generates the cash needed to pay debts and fund operating expenses. These reports provide critical information about the health of your business.

How to Improve Your Business Cash Flow Management

To improve business cash flow, you need to find ways to increase your inflow of cash and reduce cash outflow. Therefore, you need to make sure you can meet your expenses. Doing so will enable you to run your business more smoothly.

How do you do this? First, stay on top of your cash flow. You can do this by analyzing your cash flow to identify where your business stands. Additionally, be proactive when invoicing, and use mobile payment options. Cutting costs, where possible, will also reap positive results on your cash flow spreadsheet.

Stay on top of your cash flow

To stay on top of your cash flow, you’ll need to regularly review your company’s costs, overhead expenses, taxes, salaries, shipping fees, or payment cycles. To support your efforts, retain the services of a reputable accountant. You can also perform cash flow projections yourself as needed to predict how your business will fare as time goes on. Even if you have an accountant or accounting service, keep your own records current on a cash flow spreadsheet.

Once you have a clearer understanding of cash flow management, you can make any needed adjustments. Taking this initiative will help you catch any costs that may diminish your cash flow over time.

Be proactive with invoicing

Realizing a healthy business cash flow also includes invoicing customers so they remit their payments on time. You can make this happen by doing the following:

  • Switch from billing by the hour or per project to a retainer-based model. A retainer-based model enables a client to pay a specific amount each month for established services.
  • Invoice on time. This creates a sense of urgency in the customer’s mind and encourages them to remit regular payments.
  • Use cloud-based services for invoicing. Doing so will make it easier to accept payments and invoice clients online.
  • Add the payment terms, including late fees, in customer contracts. This gives your customers a clear understanding of their payment obligations, including your return policy.
  • For slow payers, require payment in advance.
  • Always stick to a payment schedule. By taking this approach, your customers will also get into the habit of paying on time.
  • Offer financing. Give your customer every chance to use and pay for your services or products. By offering to finance, you can include credit-worthy customers to your paying clients.

Utilize mobile payment options

business cash flow

To incentivize customers to pay, you can also include mobile options for payments in your cash flow arsenal. To accept remote payments, you can provide built-in payments or payment links for customers to conveniently pay with.

For example, you can build a digital shopping cart where customers can enter their card details on your website’s platform. In turn, the bank card attached to their mobile app will be instantly charged. Customers can also follow a link to a digital invoice that you mail. When the customer clicks the link, they can enter their card details to process the transaction.

Whether you are an eCommerce business or run a brick-and-mortar location, you can also ask for payment with a QR (quick-response) code. This card-not-present transaction provides more security, as the customer’s card-connected details confirm the card’s owner. QR codes may be used to pay for purchases for in-store or website checkouts.

No matter what option you choose, it can help the costs that factor into your cash flow management strategy.

Cut costs where possible

To increase your business cash flow, pare down your spending. You can do this by:

  • Make payment terms shorter. By doing this, you can reduce the time it takes to pay your own expenses.
  • Switch to online solutions. Reduce the use of paper-based processes that keep costs high.
  • Reconfigure processes that increase costs. For example, save time and money by setting clear expectations for employees to follow, including goals and delivery dates.
  • Reduce overhead expenses and let employees work from home.
  • Use contract workers or virtual services to decrease staff costs.
  • Find more consistent and predictable streams of revenue. That way, it makes it easier to monitor your business cash flow and plan for expansion.

When setting priorities for your business, your business cash flow should be at the top of the list. Don’t overlook the importance of the process. If you want to succeed and expand, learn the strategies that will help you operate within your budget. Understanding how cash flow management works will give you the means to properly scale for growth.