Anyone who manages a business understands that cash flow is important. But to fully appreciate the importance of cash flow and how to deal with cash flow problems, it’s important to understand what specifically we mean by cash flow when it comes to business. Once we have a clear cash flow definition, we can think about some straightforward ways to improve business cash flow and cash flow management.
What Is Cash Flow in a Business?
On a basic level, we all understand that cash flow is a reference to how much and how easily cash is coming into an out of your business. If you have plenty of money coming in regularly to cover all the expenses that require money to go out, you have good cash flow. For accounting purposes, however, a more useful definition of cash flow is the difference between the amount of cash you have access to at the beginning of a given period relative to the amount at the end of the period.
How Do I Calculate Cash Flow?
So, what is a useful cash flow formula that we can look at to see if our cash flow is as healthy as we want it to be? To calculate cash flow, choose a period, for example, a month. Take note of your opening balance, the amount of money you have on the first day of the month, and compare it to your closing balance, the amount on your last day. If the closing balance is higher, you have a positive cash flow. If the closing balance is negative, you have a negative cash flow.
How Can You Improve Cash Flow in a Small Business?
Now that we have a good standing of what cash flow is and where we stand, here are some useful cash flow management tips for maximizing cash flow and dealing with cash flow problems in a small business.
It’s important to remember that while positive cash flow is clearly desirable, it does not necessarily mean your business is doing well. You may be receiving infusions of cash from investors you will be forced to account for later if you’re not generating sufficient profits, for example. For this reason, you should always be considering ways you may be able to improve cash flow, even if you are currently in a positive cash flow environment.
To increase cash flow management, take the following steps.
1. Positive Cash Flow Management
One way to improve cash flow is to raise the amount of money your business generates. You can do this in one of three ways:
- Increase productivity, so you sell more of your product during the cash flow cycle
- Raise prices on your product, so you get more money for the same amount of product
- Submit invoices more quickly, so you get paid more often within the cycle
Naturally, you can do all three of the above if possible.
2. Negative Cash Flow Management
The other way to improve cash flow is to reduce the amount of money you’re spending. You can do this by cutting costs, such as by paying less for overhead expenses, or by negotiating longer pay cycles with vendors, so you owe less each month.
3. Cash Infusion Management
Other ways to bring cash into your business, thereby improving cash flow, include:
- Selling assets you don’t need
- Bringing in more investors
- Taking out a loan
These are all short-term solutions that can have significant long-term consequences, so you will typically want to consider one of the first two options first. However, a cash infusion can be a very effective strategy when you need a quick cash flow boost.
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