What is cash flow management?
Cash flow is the movement of money into and out of a business over a period of time. If the inflow of cash is higher than the outflow, a business's net cash flow is positive. If the outflow of cash is higher than the inflow, then the net cash flow is negative. Cash flow can come from sales based revenue, interest, royalties, investments, and licensing agreements to list a few.
A good distinction to make is that cash flow is different from profit. Profit is the leftover money you have after paying all your business expenses, gained from having good cash flow management.
Why is cash flow management important?
Assessing cash flow is important, especially for startups and small to medium-sized enterprises (SMEs), in order to measure a business's overall financial performance. Cash flow management makes sure the money is being managed effectively, ensuring expenses and debts are being paid for, like paying employees and suppliers. Most small businesses experience cash flow shortages at one point or another. Proper cash flow management keeps these difficulties to a minimum.
For SMEs, having negative cash flow can be critical to the longevity of their business. SMEs lean heavily on their predicted monthly incomes to get by. When an SME is in negative cash flow long-term this leaves business owners grasping at straws trying to make ends meet.
Good cash flow management will also give your business leverage in negotiations if you are looking for growth funding in the future, often leading to more favourable funding terms.
How does a business know when to improve their cash flow?
Issues in cash flow management will only become clear once you have started budgeting, reporting, and setting clear cash flow targets. However there are warning signs to look out for.
You are making late payments, or missing them all together
Do you have a pile of invoices that you noticed need to be paid? You might have a cash flow problem. It is impossible to pay for invoices with money you simply do not have, no matter how many reminders there may be.
You have negative cash flow consistently
Businesses know that their cash flow fluctuates between positive and negative for many reasons. Negative cash flow can happen because of an unexplained incident like a machine breaking or losing a key client.
You have to shift funds around to cover costs
If you are struggling to pay for your business costs and debt, or having to make payments for the business out-of-pocket, this is a huge sign of negative cash flow. In a positive cash flow, you would ideally always know when funds were coming in and when.
So how do you improve your cash flow management?
Developing smooth cash flow management can seem like a challenge when you have had negative cash flow for so long, however it is possible to fix it.
- Avoid big payments where possible, split your payments into smaller instalments to allow for a smoother cash flow.
- Streamline your accounts receivable by following up on any outstanding invoices that need to be paid to your business, send out your invoices quicker, encourage early payments by offering deals or incentives.
- Set a strict budget and stick to it as much as possible, reducing any unnecessary expenses you see coming up.
- Where relevant, you could consider increasing the pricing of your products to try and increase your inflow.
- Improve your inventory management through avoiding over or under ordering, selling products that you need to get rid of at discounted prices rather than throwing them away.
- Consider any borrowing options if possible to gain more funding for your business, though always read the fine print before committing to a business loan of any kind and make sure you have improved your cash flow management, otherwise the extra cash will not solve the cash flow problems. You may also struggle to secure funding if you can't demonstrate good cash flow management.
Need some help from Mighty Partners?
Have you just recently improved your business’s cash flow and need a cash injection to kickstart some growth? We here at Mighty Partners tailor-make alternative business funding solutions to ensure your business has the best opportunity for growth and expansion, working with you like your business is our own and committing to being with you through the whole growth process.
We can help you smooth out your cash flow through –
- Customised debt financing
- Your choice of lump-sum payment or instalments
- Fast approvals to kick-start growth
We know that a smooth cash flow is key to unlocking your businesses' full potential. At Mighty Partners, we build relationships with our clients and treat your business like our own. Contact us today and supercharge your businesses growth.
