How to Improve Your Cashflow in Business

Effective cash flow management is important to run a business venture successfully. An important part of building a business is to know potential business pitfalls and avoid them, as much as you try to maximize every opportunity for growth. Given that lack of cash is the reason why over 80% of businesses fail, you must be able to track your inflow and outflow, and what you have in hand to prevent your business from crashing. Hence, you need to understand cash flow as an important metric to measure the sustainability and predict the profitability of a business.

What is Cash Flow in Business ?

Cash flow refers to the inflow and outflow of cash in your business. When a business has a positive cash flow (where the money flowing in via sales revenue exceeds the money flowing out via expenditure), it’s able to keep running successfully. However, when a business has a negative cash flow (where expenditure, such as salary, rent, and other costs of running the business are greater than revenue), it runs out of capital and closes up. 

Hence, cash flow is the test of the financial health of your business. A positive cash flow means your business is in a healthy position financially. The higher your positive cash flow is, the healthier your business is. This is why effective cash flow management is crucial to the success of a business, as it ensures that you only make wise spending decisions, while constantly looking for ways to improve your business cash flow. 

Difference Between Cashflow and Profit in Business 

Cash flow and profit are two distinct business terms with different meanings, and more importantly, they impact your business differently.

While cash flow includes the inflow and outflow of money in your business, profit is determined by subtracting your running cost from your revenue. A major difference between cash flow and profit is that profit can serve as a good indicator of your business’s immediate success, but cash flow is an indicator of the overall health of your business. 

It’s important to note that cash flow is the better metric to measure a successful and thriving business because businesses can continue to make profits while struggling with their cash flow. However, the long-term effect of poor cash flow is more telling for a business, even when it’s profitable in the short term because it’ll struggle to fulfil its financial obligations as time goes on.

Causes of Poor Cash Flow in Business 

There are several reasons why a business can end up with a negative cash flow. Some of these are:

1. Inefficient Management

There are many things in running a business that can qualify as inefficient management and culminate in a negative cash flow. For instance, investing in the wrong marketing strategies that give little to no ROI, or having employees do tasks manually that can be automated. These might result in poor productivity, poor sales, and high operating costs.  Inefficient management also includes investing in services or products that are not essential to your business growth, especially in the short term. This drains your resources and adds little or nothing to your revenue. 

2. Improper Planning

Failure to create a viable plan for your business and set achievable short-term and long-term goals can be detrimental to your business cash flow. This can impact both the quality and quantity of employees that you employ, cause you to expand too quickly, or get other crucial business decisions wrong which is capable of affecting your revenue in the long run. Poor financial planning means you might be short of funds to keep running your business expenses and become dependent on loans which you might not be able to pay back in the long run. 

3. Lack of Emergency Funds 

Cash reserves are a crucial part of your business's financial health as it ensures you stay afloat in case of an unforeseen occurrence. More often than not, these unforeseen occurrences that stall cash flow happen in business, and a lack of emergency funds means you will struggle to navigate such incidences. A good business practice is to have a cash reserve or emergency fund that can keep your business running for a few months and buy you time to bounce back in the face of tough unforeseen situations, instead of completely shutting down your operations.

4. Late Payments

In many cases, customers may also contribute to the negative cash flow in business due to late payments. Late payments are also likely to be caused by complicated invoicing and inefficient payment processes. Whatever the case is, delayed payments hurt your business cash flow. It reduces your inflow without a commensurate reduction in outflow as well, leading to a negative cash flow over time. 

By now you’re probably wondering how you can improve your business cash flow. Here’s how:

Strategies of Improving Cash Flow in Your Business 

1. Streamline inventory management

Streamlining your inventory is an effective way to boost your cash flow. You can do this by taking stock of your products from time to time (e.g. quarterly) and noting products that are in demand and those that are not. This way you know the products you should buy more of and those you should avoid. 

Also, the products in your inventory that are not getting sold become dead stock. They tie up some cash and hurt your overall cash flow. The best thing to do with these products is to get rid of them. This means you might have to sell them at a discount, so you don’t make any profit on them, or even sell them at a loss. It’s more important to get whatever amount you can get out of them and invest it back into high-demand products to keep your cash flow moving, than leaving the product in your inventory and you’re getting nothing for them. 

2. Maximize Invoicing 

You can use invoicing to improve your cash flow by sending your invoices out to customers very quickly. The faster you can send out invoices, the faster you’re likely to get paid. Make sure that your invoice is easy to read with clearly stated terms, such that crucial information such as type of payment, amount, due date, late payment charge, etc., are not obscure. 

You can also use your invoices to try and get advance payments for your products/services. This means you can always get enough liquidity for your business. For customers who don’t pay in advance and are likely to make late payments, ensure you charge a high interest rate when dealing with them. But more importantly, keep up with them. Send payment reminders with the invoicing software ahead of the due date and call them regularly if you have to. 

3. Leverage cash flow forecasting 

Before you’re able to improve your business cash flow, you need to first have an idea of your cash flow projections. This is why you need a cash flow forecast for three months, at least. So, you’re able to calculate your net cash flow using your expected income and expenditure. A positive figure means you’re on the right track, while a negative figure means you might struggle in the coming months. 

With an accurate forecast, you’re more effective in managing your cash flow. It helps you to make smarter financial decisions and plan your budget better.

4. Diversify revenue stream 

Diversifying your revenue stream by offering more products or services that are in high demand can add to your positive cash flow. The more products or services you offer that generate revenue for your business, the more you’re able to keep your cash flow running. However, in the absence of diversification, when you only offer a specific product/service, if the demand for your offering drops consistently over a period of time, your cash flow is bound to take a hit. 

5. Maximize Payments 

Payment processing plays an important role in improving a business’s cash flow. It’s important that you make the payment process as easy and seamless as possible. The easier your payment process is, the more willing customers are to pay, and vice versa. Hence, maximising this process can boost cash flow.  Offering multiple payments is an effective way to make the most of payments. Customers don’t want to feel cornered into making a payment with a payment method they’re not comfortable with. They’d rather withhold their money. So, the more payment method you offer, the more revenue you can generate. This means you need a payment partner that allows you to seamlessly collect payments from your customers and provides you with options to maximize payment for your cash flow. 

With SeerBit, you have a payment partner that allows you to receive both in-person and online payments on your platform. We have a host of solutions, such as invoicing, cards, payment links, virtual accounts, recurring payments, etc., that help you receive payments quickly to keep your cash flow running while keeping the process seamless for your customers. You can also leverage our solutions, such as the recurring payment solution to prevent late payments that can impact your cash flow. 

Conclusion

Cash flow management is a crucial part of running a business, and the only way to keep your business running is to keep your cash flow positive. This article provides a proper understanding of what cash flow is in business, why businesses have a negative cash flow, and some of the most appropriate strategies to improve your cash flow.