Effective cash flow management is crucial to building a stable business and maintaining strong relationships with suppliers and lenders. Without it, your business won’t flourish. And over time, paying bills, meeting financial obligations, and delivering general operating activities will slow, which could lead to serious struggles.
That’s why we’re here to help! In this article, we’re going to go over the best tips for managing cash flow so that you can move ahead with greater confidence.
What are the different types of cash flow?
In a nutshell, cash flow centers on tracking money coming in and going out of your business. To do better cash flow management you need to first understand the different types of cash flow.
There are several types of cash flows:
- Operating cash flow - net income, depreciation
- Finance cash flow - money from issuing debt and equity, plus company payments
- Investing cash flow - amount for purchasing investments and capital assets
- Free cash flow - a measure of profit resulting in your ability to repay creditors
Negative cash flow is bad, right?
A healthy cash flow enables you to run and scale your small business successfully. But experiencing negative cash flow doesn’t necessarily mean you’ve got a problem.
It can indicate that you’ve spent money on an investment or equipment that your business will reap the rewards in the future. If your company uses an accrual method for accounting, you can have a positive net income but a negative cash flow for the same year.
However, when cash flow is continuously negative and never shows an uptick is a strong indicator that your business is in trouble. You’re continually spending more money than you’re bringing into the company – and you need to take action.
Positive cash flow indicates a level of liquidity — a sign that more money is coming into your business than flowing out. Having positive cash flow is crucial to the survival of your business and gives lenders/creditors reassurance that you’re a good investment for them.
Common cash flow management problems
Problems with cash flow management usually stem from:
- Low gross product margins
- A lack of forecasting/cash flow analysis (often encountered by small businesses experiencing growth)
- Market fluctuations leading to lower sales
- Poor expense management
- Outdated banking and accounting software
- Inconsistent approach to inventory management
- Spiraling debt e.g., small business loan repayments
- No emergency cash reserve
- Slow payments from clients
- A lack of bookkeeping or regular checks of financial statements
The impact of poor cash flow management
Poor cash flow management will have a detrimental effect on your business.
It’s likely to mean that you, as the business owner and any beneficial owners, are unable to:
- Persuade a bank/lender/financial institution to consider extending credit/allow you to borrow more money
- Make debt repayments on time and therefore repeatedly incur late payment fees, commonly known as debt service
- Benefit from tax rebates because of poor financial reporting
- Have enough money to pay suppliers for goods, equipment, or services
- Pay expenses
- Build an emergency cash reserve
- Afford long term investments — capital expenditures
- Reinvest in your business
Ultimately businesses that don’t have a clear, actionable, and adequate cash flow strategy in place struggle and fail more often than those that do. Be sure to protect yourself and your business.
Why a cash flow statement is vital
It’s essential to review financial statements, including your income statement. This helps you understand how revenue flows in and out of your business.
But a cash flow statement serves a different purpose. It shows precisely how much cash you can lay your hands on if you need to.
It’s vital to track precisely how much money is coming into your business versus cash expenditure going out. This will help with cash flow projections and identify a potential cash flow problem before it happens.
How to get a cash flow statement
Your bookkeeping needs to be spot on. Otherwise, your cash flow statement won’t be a true reflection of your financing activities.
You can choose from a range of accounting software or track cash flow your own way, for example by creating a spreadsheet comparing total unpaid purchases to total sales each calendar month.
Calculating cash flow
There are two ways to calculate cash flow
- Direct method: This method shows the actual cash amounts that are coming in and going out of your business, e.g., receipts, payments
- Indirect method: This method shows net income (i.e., net profit) generated in a given period then calculates the changes based on assets and liabilities
Addressing cash flow problems
Tackling cash flow problems quickly can be crucial to the survival of your business. There are a variety of ways to do this, including:
- Creating a cash flow budget that forecasts your business needs
- Getting a flexible line of credit, so you have cash on hand (applying for overdrafts, secured/unsecured loans, etc.). But don’t replace one form of debt with another — be sure you’re not over-stretching yourself. This should only be a temporary solution
- Exploring ways to charge more money to customers while maintaining a competitive edge
- Reviewing and improving your marketing activities to drive an increase in sales
- Understanding your operating expenses and finding ways to cut them if you can
- Controlling your inventory — excess stock could turn into a cash drain
- Negotiating different payment terms to those you owe money to
- Reviewing and improving the payment terms for the goods and services you offer, e.g. including penalties for late payments
- Chasing late payments (accounts receivable)
- Get an accounting system in place
Invoice2go helps you manage cash flow
- Explore Invoice2go Money banking
See, track, and manage business cash flow in one place. Invoice2go Money is a business bank account (plus Visa® business debit card) enabling you to accept $0 bank transfers and have payments auto-reconciled to invoices for you.
- Turn on notifications to get notified when invoices are paid
Get in-app messages to track invoices and payments when you’re on the go.
- Use Engage
Engage helps you build relationships with existing customers that can lead to repeat sales.
- Instantly generate business reports
Business reports help you see the bigger picture when it comes to invoicing and getting paid.
- Get started with Gusto
Gusto runs your payroll in minutes and automatically files taxes.