Cash flows determine the cash situation of your business, meaning what’s coming in and what’s going out. Prosperous businesses strive to increase the amount of money coming in and minimize the money going out by cutting expenses and taking other financial measures.
A fine business cash flow position is also extremely beneficial in future business financing. Lenders review your cash inflows, credit scores, and credit rating to determine your affordability for the business loans.
Credit scores are assigned by credit bureaus: Experian, Equifax, and Transunion.
Lenders assume that you are responsible for handling your financial obligations if you have more cash inflows and a higher credit rating.
Following four important factors help us in calculating the cash flows of a business:
Best accounting tools are available which can help your business calculate cash flow statements accurately. Generally, we calculate the cash flows as:
Net Cash Flow = Operating Cash Flow -/+ Cash Flow of Investment Activities -/+ Cash Flow of Financial Activities
Lenders are interested in your payback affordability and shareholders want their dividends, this cash flow gives them quite a transparent picture regarding both dividends and credibility.
2. Operation Activities Cash Flow: Some examples of operational activities are:
OFC also called, cash flow from operational activities, indicates how much cash does your business’s operations consume and how much you earn out of it.
3. Investment Activities Cash Flow: Following factors affect this cash flow:
Capital expenditures
This cash flow calculates how much money is coming/ going in long-term investments. Primarily, it’s relevant to purchase/ selling/ maintenance of fixed assets.
A good company cash flow is directly proportional to the financial health of your business. It highlights that whether or not a company has enough to cover:
A hearty cash flow means:
Now we know that solid cash flows are as much crucial for a business’s breathing as trained employees, engaging marketing strategies, and upgraded products/ services offered.
But how do we do that? Well, there are myriad ways we can ensure cash flow success:
You can benefit from the long formed relationships with suppliers/ vendors by asking them for discounts or other negotiations:
Contract Cancellation | You can ask for contract termination and hire a better vendor if you have been facing challenges like:Late deliveriesIncomplete/ faulty deliveriesBad customer support, etc.As more and more businesses are going digital, a new supplier may offer better facilities. |
Bulk Orders | If you plan on ordering more from vendors (for example in case of market expansion, or introducing a new product), you can inquire about discounts in exchange for bulk orders and suppliers are usually more than happy to lend you. |
Payment Terms | If your cash flows are in the decrease phase, you may ask for an extension in payments for maintaining cash outflow and inflow. |
Keeping the existing customers is as much significant as gaining/ attracting new ones. While later requires marketing expenditures and a proper strategy, the former is quite possible through upselling:
Market expansion is a great way to boost cash flows and utilize them for affording expenses, investments, and debt repayments.
You may expand via:
If you see a little room for improvement in current products and services, consider expanding your audiences through newer and effective ad strategies. E.g. numerous brands are expanding their potential customer base via TikTok (video networking social application).
A new and relevant launch of products and services is a great way to bring in more cash inflows. E.g. makeup brands are always adding to their product menu from palettes to skincare, to makeup tools, etc.
If your cash flows are too positive, it is also an alarm and an encouragement for you to invest this money to earn more money. You can invest in stocks, expand your business venture by starting a mini business and buying equipment, and you may also employ it to clear debts and improve credit ratings and credit scores.
If your product/ service value is incomparable and loved by a larger set of audience, chances are that you can further decrease this price sensitivity by heavy advertisement and communication of the value you provide.
Even if you can afford business expenditures well with current prices, underpriced products (in comparison to competitors) can affect your business image somehow.
Moreover, businesses suffered supply shortages due to pandemic hit in 2020 rose overall prices, so consider keeping them competitive for hale and hearty cash flows.
Small business loans are feasible for improving short-term cash flows. Businesses may also qualify for revolving credit and interest is charged only on the amount used. If you’re struggling to pay your suppliers, purchase order financing companies can help provide the capital needed without sending you into debt.
Moreover, since these loans are released in a short time and have repaying facilities over a set period, these can clear immediate needs quicker.
Loans can be employed in:
Manual work and local hiring can be costly sometimes, and technology has provided efficient substitutes. It results in positive cash flows. Moreover, security risks and recovering from virus breaks can be extremely expensive.
Investment in security software can prevent such expenses, and:
Businesses may suffer from cash shortages due to poor invoice management. The faster and diligent you are with sharing invoices with your clients, the quicker you get paid.
Myriad accounting tools are available in the market to produce and keep track of these invoices and remind of any overdue payments.
You may also encourage customers to pay earlier and get incentives like discounts or charge a fee on late payment.
Full-time hiring is not a must for businesses today. You can easily outsource technological experts for software up-gradation, 24 hrs. remote customer support, accountant for tax season, etc.
Platforms like Upwork and Freelancer.com have further eased access to professionals short-term, paid significantly less, and improved cash flows.
Forecasting in cash flows aids you to plan and be prepared beforehand for both investments and expenses. Software applications like spreadsheets come in handy while preparing these forecasts, you just need to input:
In case you find out ample cash in reserves, you can plan for:
This also prevents you from surprises like extremely low cash in reserves, etc.
In addition to the old payment methods like credit cards, bank accounts, and cash, etc., consider adding modern electronic payments facilities too e.g. PayPal, mobile payments, etc. This facility will add convenience to the existing customers, and transactions are also quicker.
Plus, it’s safe and time-saving. Furthermore, your bill payment regime is also eased and you can enjoy premium facilities too.
For a short-term cash flow boost, your company’s valuable asset (e.g. equipment), can be refinanced and held as collateral in return for loan money by asset finance providers. The amount very much is influenced by the current value of the asset.
Increasing income and controlling expenses go hand in hand while maintaining healthy cash flows. To recheck upon operational expenses, the following tips can help:
Lease Equipment | In case both cash and loan are not options for you, leasing equipment can swell monthly cash flows to some extent.Note that this equipment won’t be your fixed asset. |
Reduce Expenses | Unplanned expenditures can cost high and disturb your cash flows. Plan and cut out avoidable expenses to save cash. |
Business Processes | Your operational manager can help you find any operational loopholes (if any), to speed up company procedures, save time, and save employee wages. |
Where technological advancement has eased access and procedures, it has also catered hackers to make frauds. Businesses need to seriously consider IT and bank account security to eliminate chances of break-ins.
These are some of the many practices advised by shrinking deceits.
There are three types of cash flows:
Its cash insights help businesses in decision-making. Companies plan investments and debt repayment schedules via cash flows.
This statement reflects the good/ bad health of cash reserves in the company. Shareholders, investors, and lenders judge the liquidity and profitability of an organization via cash flow statements.
Some of the ways a company can keep the cash flowing are:
Managing cash flows, encouraging clients to clear bills in time, and supplier negotiation are some practical ways to protect the cash flows of a business.
Cash flow forecasting has the following steps: