The cash flow of your business is the amount of cash moving in and out of your business at a particular time. For example, how much money are you spending on business operations, salaries, transport and maintenance? Many of your assets may even be depreciating.
On the other end of the spectrum, how much money are you earning through various sources whether it is direct payment from customers and clients, interest, rent, affiliate, and other direct and indirect sources.
Healthy cash flow is when you are making more money than you are spending. This is also called a “good cash flow”.
In most of the businesses, the cash flow is maintained in the cash flow statement. This is a financial document that chronicles what is happening to your business cash during a specific period of time.
What’s the difference between cash flow and profit?
To understand the difference, you need to understand what profit is. Your business profit can be categorized in the following manner:
- Gross profit: This is the profit your business makes after subtracting manufacturing and selling costs. It’s like, you add up all the money that is coming to your business, then you subtract the cost of goods sold from your total sales, and what is left, is your gross profit.
- Operating profit: This is the money left to you after deducting all the business costs, but not the taxes.
- Net profit: Your net profit is gross profit minus all the operating costs, rent, interest, salaries and taxes. This is the cash in hand you have that you can spend on your own needs or to further grow your business.
Hence, your cash flow is just a condition that tells you how much money you’re spending on running your business and how much money you are earning through various sources.
After comparing both inflow and outflow of cash and then after deducting various operational expenses as well as direct and indirect expenses, what is left, is your profit.
How can your business maintain a healthy cash flow? Let’s explore…
Every business is unique. The suggestions to maintain a healthy cash flow listed here may be generic in nature, but with little tweaks, they can more or less be applied to any mainstream business.
1. Streamline your invoicing system
Inefficient invoicing can create holes that quietly drain away your cash. Most of the invoicing can be automated. For example, if you render service to someone, your project management system can automatically make entries in your invoicing system and the invoice can be created and sent to the other party without any manual interference.
In a similar manner, timely reminders can be sent to your customers and clients if they don’t pay. A copy of the remainder can also be sent to your inbox so that you know that follow-ups are being done and there are some payments that are pending. This way, if you need to interfere personally, you can do so, otherwise, let your automated system handle it.
Also set up a system that encourages your customers and clients to pay on time. Some of the steps may include
- Charge a late payment fee.
- Provide incentives for early payments, like discounts or access to premium information in advance.
- Create a pre-defined series of reminders with automated broadcasting.
- If possible, take a major part of the payment in advance itself.
2. Whenever possible, lease business assets instead of buying
This advice may not be applicable to all businesses, but owning assets can be a big expense and besides, you may need to pay a lump sum amount that can strain your cash flow. For example, instead of purchasing land to set up your factory, you can take a factory space for lease. The same can be done with machinery. Transport vehicles can be leased whenever they are required instead of purchasing them and then using the expensive parking space while they are unused.
Since you are making payments incrementally, it helps you improve your cash flow. The lease payments are considered a business expense and hence, they can be written off on your taxes.
3. Track your inventory efficiently
Your inventory can be a big drain on your cash flow if you don’t keep a close watch on it. Are you needlessly placing orders when there is no need? Is your inventory going to waste because it is not properly being taken care of? Are you stocking items you don’t plan to sell in the near future?
If possible, invest in a good inventory management software, especially something that captures maximum information with the minimum human interference.
4. Leverage outsourcing to improve your cash flow
The Covid-19 outbreak has been transformational for businesses – more people are working from home instead of regularly coming to offices. It means, you don’t necessarily have to hire people full-time and make them sit in your office and consume your office resources. People can work from home. They can telecommunicate. If all they need is an Internet connection and a PC or a laptop, outsource work to them instead of hiring them full-time.
This way, you are paying for just their services and you’re not spending money on maintaining their presence in your office. You also get access to better talent because when you outsource, you are no longer confined to the staff you have already hired.
5. Raise your rates or prices
Are you charging your clients and customers right? How much are your competitors charging? How much are you spending on machines and equipment to render products and services you are providing? Are you being appropriately paid for your talent and experience?
If possible, do a six-monthly evaluation of the value you deliver and then raise your rates or prices accordingly. Increase the prices in small increments, in such a manner that your customers and clients don’t even realize it. Experiment with different rates.
6. Increase your business cash flow by expanding your market
Are you mostly an off-line business? Have explored the online market where you can sell through your website or mobile app? Taking your business digital can expand both your local and distant markets.
There might be many people who simply don’t want to come to your business physically and would love to do business with you if they can transact online. If you start providing your products and services through your website or mobile app, they may instantly start doing business with you. Similarly you can cover more area through your website or mobile app and this can have a remarkable effect on your business cash flow.
7. Reduce operating expenses
Reducing your operating expenses can have a significant impact on your business cash flow. As they say, “money saved is money earned.” Are you overpaying for your broadband connection? Are you unnecessarily using electricity in the areas of the building where it is not required? Are you using heating when the temperature is fine? Are your computers and other equipment running even when no work or production is taking place?
You will be surprised if you do an audit of your operating expenses and realize how less you can spend and how it can affect your cash flow.
Conclusion
Having a healthy cash flow isn’t just about earning more profits or growing your business more than what it is right now. It is also about tapping into your current possibilities. Make sure you get payments from your customers and clients. Keep a close watch on your inventory and make sure that you are stocking only the items you intend to sell. Outsource work wherever you can. Explore the possibilities to reduce your operational costs. These in themselves can have a tremendously positive effect on your business cash flow.