Cash flow is a key factor for the health of any business. Without healthy business cash flow, you can’t invest in your business. If your access to cash is severely limited, you may even have trouble with basic expenses such as payroll.
What is Involved in Cash Flow Analysis?
In order to track your flow of cash, you need to perform a cash flow analysis that identifies every single dollar that flows into and out of your business. If you have a dedicated bookkeeper or accountant, he or she should perform this task once per month. Smaller businesses may want to handle the job themselves rather than paying an expert to do it. There are several good accounting software programs that simplify the task of generating accurate statements.
Start by figuring out your business’s total cash balance at the beginning of the period you’re calculating. Fill in both inflows and outflows, separating them into categories as necessary. The most common category is operating inflow and outflow. Inflow includes sales and receivables. Outflow includes payroll, inventory and other operating expenses such as rent, utilities and any payments to suppliers or for services associated with the business.
If your business invests in assets not needed for daily operation, you’ll need to create a category for investment inflow/outflow. This includes real estate or investment securities as well as equipment. Another category, one that’s mainly relevant for larger companies, is financing activities. This is for issuing stock or dividends to stockholders or buying back stock shares.
Your statement will be the sum total of all these activities. Of course, the real point of this task isn’t simply to come up with a figure but to learn from your results.
How to Improve Your Business Cash Flow
Let’s explore 15 practical ways to improve your cash flow for your business.
1. Conduct a Comparative Cash Flow Analysis
It’s important to track every dollar that flows in and out of your business. You need to look at multiple statements over time as a single statement doesn’t give you the whole picture. Consider factors such as seasonal fluctuations and external events that you can’t control such as the COVID-19 pandemic.
2. Plan Ahead
Don’t let cash flow problems catch you by surprise. Manage your spending by looking for cash discounts and avoid late fees. Track your inventory so you order supplies in appropriate quantities.
3. Reduce Spending
Even small reductions in operating expenses add up. Make your business more energy or fuel efficient. Negotiate with suppliers for better terms. Evaluate your staffing policies.
4. Build Up an Emergency Cash Reserve
You never know when you might need extra cash due to an economic downturn or unexpected disaster. Put aside a certain amount of money for such scenarios.
5. Create an Efficient Invoice Policy
Bill your customers promptly. Make sure your bills are clear, with a payment due date and penalties for late payments. Track your accounts receivable and follow-up with customers when payment is not received on-time.
6. Manage Profit and Loss
Analyze all the expenses associated with running your business. The more aware you are of how each expense contributes to your profits, the better you can manage cash flow.
7. Provide Your Customers with Incentives to Pay Early
You may want to consider offering bonuses or discounts to your customers for paying on-time or early.
8. Focus on Free and Low-Cost Marketing Strategies
Email and social media marketing, for example, are less costly than paid advertising. Other marketing strategies could be optimizing your website for search engines (SEO) and ensuring your business is listed on major online directories and map listings.
9. Consider Leasing Equipment
If you need new equipment or technology to run your business, it may benefit your cash flow to lease rather than buy these items.
10. Track the Timing of Cash Outflow
Business cash flow is not only about how much you spend, but when you disperse funds. This probably varies according to the season and other factors affecting business. Be aware of how expenses are likely to rise and fall in the coming months, so you can plan accordingly.
11. Consider Raising Your Rates or Prices
If you haven’t raised your prices or rates recently, you may be overdue for a price increase. Most businesses consider raising their prices every two to three years.
12. File Payroll and Other Taxes Promptly
Delays in filing taxes carry penalties that harm your cash flow. The IRS imposes strict penalties for delays in depositing payroll taxes.
13. Sell Excess Inventory and Unused Equipment
If you have inventory that’s not likely to sell, it’s better to sell it in bulk or auction it off than to let it sit and take up space. Similarly, get rid of tools, equipment or machinery that you’re not using.
14. Use Efficient Bookkeeping Software
In order to improve cash flow, you need easy access to all the numbers. User-friendly software makes it simple to perform cash flow analysis.
15. Seek Business Financing
Accounts receivable financing and invoice factoring are forms of business financing specifically meant to improve cash flow so that a business can operate better.
If you’re looking for an effective way to quickly improve cash flow for your business, Riviera Finance offers invoice factoring solutions for all types of businesses. Riviera has been a trusted source of business funding for more than 50 years. Learn more about invoice factoring and how it can help your business with cash flow support.