Whether a business is profitable with ever-increasing sales, or it is stagnant in its growth or facing losses, cash flow continues to be one of the most important financial KPI that it should look after.
This is because, even if a business is doing exceptionally well, there might be a gap between its receivables and payable such that payable are due earlier.
For a business, who isn’t tracking cash flow and just the receivables and payable will be put on a tight spot. It can fail to pay its dues on time, have its payroll delayed and therefore have its creditworthiness questioned.
To steer clear of such cash flow problems, your business’s finances, operations and investing activities should be running efficiently. Ensuring this will improve cash flow for your business and thereby also it's brand.
This article covers the following topics:
- What is Cash Flow?
- 10 Ways to Improve Cash Flow for Your Business
- How can Deskera Improve Cash Flow for Your Business?
- Key Takeaways
- Related Articles
What is Cash Flow?
Cash flow refers to the money moving in and out of the business.
Typically characterized, cash flows are found in operations, investing and financing functions of the business. These are the 3 types of cash flow activities.
Cash flow in financing activities involves cash activities related to non-current liabilities and owner’s equity. In the case of operating activities, the cash activities are related to net income. Lastly, investing activities include cash activities related to non-current assets.
Hence, cash flows measure the net transfer of cash and cash equivalents of a business. It determines the cash generated or consumed by your business in a given period.
The cash flow can be positive or negative cash flow. Positive cash flow is more than just about profitability. This is because even if your business is profitable, it is still at risk of negative cash flow. Negative cash flow happens when you are unable to meet your future payment obligations because of mistiming incoming funds.
Positive Cash Flow
Positive cash flow means that the net balance in the cash flow statement of a business over a given period is greater than zero or positive. Positive cash flow means that your business has enough working capital to cover its bills and your business will not require additional funding over the period that a statement covers. A positive cash flow indicates that the business is liquid
Negative Cash Flow
Negative cash flow is when the business spends more money than it makes during a specific time period. A company’s free cash flow shows the amount of money or cash that has been left over after paying the operating expenses. When there is no cash left over after expenses, a company has negative free cash flow.
In contrast, positive cash flow means that your business has sufficient cash to meet its immediate liquidity requirements. By maximizing your business’s cash flow, it can receive profits faster, meet targets in a shorter time frame and lower your operating expenses.
Hence, improving cash flow for your business is the key to your business’s increase in revenue, gross profit, returns on investment and customer retention. How you can improve cash flow for your business is discussed next.
10 Ways to Improve Cash Flow for Your Business
Let us look into steps you can take to improve cash flow to your business:
Send Invoices Out Quickly
80-90% of the small businesses do not have a system to process their invoices. Their go-to methods for processing invoices are excel sheets, spreadsheets, emails and pen and paper. This results in losing the track of which invoice has been sent to the customer and which is pending.
Business owners who are running everything lose track of how many invoices are being created daily, have they been sent out and have they corresponded with the customers or not.
The customers after receiving the invoices have a tendency of “paying later,” which has become one of the biggest factors leading to cash flow problems for your business. To improve cash flow for your business, it becomes very important to send your invoices out quickly. Also, resort to mentioning the payment terms of your invoice.
One of the best ways to do that is by using cloud systems like Deskera which creates an invoice, sends out the invoice immediately on the email registered on the system. The business owner can then be assured that the customers have received the invoice.
Get Deposits for Large Orders
Getting deposits on all of your business’s orders becomes one of the vital ways of improving cash flow for your business.
If it is not possible to take it for all accounts, then it should be taken for the larger orders as this will ensure that you have money in your account.
This will serve to remove your worries about where the next paycheck for your employees will be coming from and you can focus solely on delivering good work.
Getting an upfront payment or at least part of it from the clients should be pitched by the business for improving its cash flow.
Offer Flexible Payment Option
One of the ways for ensuring an improved cash flow for your business is by offering flexible payment options.
The payment options can be through a cheque, cash and definitely online payment. Now, for example, in the case of accepting payment through only a cheque, it becomes a difficult process for the client as its processing has lots of manual steps in between.
In contrast, bank transfers, UPI payment in India, Giro payment in South East Asia and ACH payment in the US are the easier options of payments that should be provided to your clients to help them pay you faster.
By being flexible with payment options, it would become easier for the clients to pay and hence you will receive it sooner than when it is harder to pay. This will substantially improve cash flow for your business.
Track Due Dates and Forecast Your Sales
If your business does not have a system that does a weekly/fortnightly/monthly analysis and reporting, then your business will miss out on red flags and indicators suggesting a slump in sales.
For example, your business has clients who have to pay annually. The majority of these annual clients had signed up in March. However, the majority of your payments are due to your suppliers in February.
To forecast your sales and collections, account receivables will help in knowing what are the payments due, which are received and which of the payments would be received when.
This will help in keeping your collections above your liabilities/ pay-outs/ actual expenses. Tracking this data will put you in a much better position for managing a positive cash flow for your business.
Tracking due dates and forecasting your sales against your liabilities is one of the ways to improve cash flow for your business. Cloud systems like Deskera again are most useful and convenient here.
Lease Now, Buy Later
As a business owner, you should keep some level of liquidity in your hands to manage cash flow.
One of the ways of doing this is by leasing out the new business assets and technology, rather than buying it outright. This better prepares you for changes in sales over a period of time while ensuring your cash flow is enough.
Paying certain amounts of money over a period of time for something that you have purchased and are using is a way of generating income and paying for your expenditure.
For example, setting up your business email account with Gmail and using AWS for setting up your server are some of the ways of not buying services but using what is already available at a fee.
Only when you have an assured and steady positive cash flow in your business, should you shift to getting your infrastructure and assets. However, fixed assets can still turn out to be a block against improving cash flow for your business.
Buy on Credit Terms
If you must buy, using credit or payment terms will help to improve cash flow for your business. This means breaking down the payments you owe into installments so that you also have the cash flow for your other business expenditures.
If however, this is not possible, using your business credit card will also lead to improving cash flow for your business. However, what needs to be taken care of is not using your personal credit card as this will lead to complex accounting at the end of the year.
Another option to improve cash flow for your business, while meeting business needs and yet not spending outright is choosing EMI options. Zero EMI and low-interest options will be more beneficial to your business with no major underlying costs as this will ensure you have enough liquidity on your hands.
During a phase of cash crunch, such options will help you override the crisis by ensuring your business runs as smoothly as ever. This is made possible because there would be no liabilities that need to be answered right away.
Without these options, the crisis can be elevated with your business functioning disrupted. It can also be elevated, if to come out of it, your business takes up a loan.
All of this will affect the business health and revenue negatively. Using credit terms to your advantage is hence the way to improve cash flow for your business and ensure its success.
Join a Purchasing Cooperative
In a purchasing cooperative, groups of businesses from the same industry join to acquire goods and services in bulk and hence at lower prices.
This leads to the individual businesses being able to provide quality products at the best prices. It also increases the efficiency and market power of the businesses.
However, as an individual business, you get minimum say in what you choose and what you get. To improve cash flow for your business, if available, purchasing a cooperative can become your go-to option for getting raw materials, office supplies or assets.
Experimenting with Selling Price
Every business has a price at which its product/services is a good fit with the market. Exploring your customer’s elasticity to this price will help your business to access the potential upturns in case of cash flows for your business.
The prices can either be marked-down or marked-up and based on this, the fluctuations in demand for your product/services should be studied. Some of the results that this can reveal is that marked down prices are compensated with higher sales or customers continue to buy at higher prices.
All in all, if it is in favor, experimenting with selling price will improve cash flow for your business considerably.
Cut Down on Process Costs
Process Costs here are about the redundancy costs incurred due to over-elaborate processes. Process Costs are also about the costs added due to failure in following the process.
Following a process will involve negotiating payment terms to make them favorable for your business. It also involves ensuring that you have benefited from all the possible discounts. Processes also involve discussing and negotiating penalties and late fees to not play in the hands of your suppliers.
Cutting down such process costs is made easier when there is a system like Deskera in place which puts in place auto-approval based on workflow automation tools.
If a certain amount is crossed, this system will automatically send specific checklists or task lists to your staff or to you. This will lead to ensuring that the process is being followed.
Thus, cutting down on process costs in the ways mentioned above will definitely improve cash flow for your business.
Use Invoice Factoring Services
Invoice factoring services refers to the companies that will buy your invoices at some discounted rate.
The profit here is that in exchange for that discount provided by you, the company will pay you the remaining amount immediately. This will increase liquidity in your hands and therefore improve cash flow for your business.
It would be the companies then who would be collecting the due amount in full from your customers.
Invoice factoring services have several methods and you have to find and choose one which suits your business the most at that moment. Using invoice factoring services will lead to a quick cash influx in your business.
How can Deskera Improve Cash Flow for Your Business?
Deskera is a cloud system that brings automation and therefore ease in the business functioning. It reduces the admin time while also increasing efficiency. Deskera Books can be especially useful in improving cash flow for your business.
One of its usability lies in creating invoices on behalf of your business which can then be sent out immediately. Through Deskera books, a payment link can also be attached with your invoice. This payment link will have many options available like Stripe, VIM, PayPal and more being constantly added to the Deskera platform.
Through Deskera Books, reminders can be set with the invoices that are not being paid out, which are then sent out to the customers. Even in the case of recurring invoices, Deskera Books will become very handy especially with a payment link added to the invoice.
All in all, the follow-up system for all the invoices can be passed on to the system of Deskera Books and it will look into it for you. You can have access to Deskera's ready-made Profit and Loss Statement, Balance Sheet, and other financial reports in an instant. Such cloud systems substantially improve cash flow for your business directly as well as indirectly.
Deskera can also help with your inventory management, customer relationship management, HR, attendance and payroll management software. Deskera can help you generate payroll and payslips in minutes with Deskera People. Your employees can view their payslips, apply for time off, and file their claims and expenses online.
Each business has its own space in the industry which increases its profitability when managed well. To not lose touch with this space, your business should constantly review and update its business plan.
Decisions regarding marketing, customer service, product/service development and new customer acquisition should be specially reviewed. When done so, it will improve cash flow for your business along with its 10 other ways which are:
- Send Invoices Out Quickly
- Get Deposits for Large Orders
- Offer Flexible Payment Option
- Track Due Dates and Forecast Your Sales
- Lease Now, Buy Later
- Buy on Credit Terms
- Join a Purchasing Cooperative
- Experimenting with Selling Price
- Cut Down on Process Costs
- Use Invoice Factoring Services
Cash Flow is hence the mainstay of your business. A positive cash flow will lead to the smooth and successful functioning of your business with healthy financial status.