In the world of business, cash flow is one of the most important indicators of your overall success and ability to keep up with ongoing costs. When your cash flow is poor, your business isn’t able to take care of basic functions, and you’ll be in the red sooner or later. With excellent cash flow, however, nothing is beyond your reach, so learning more about how to optimise your cash flow is one of the most important things you can do as a business owner.
What Is Cash Flow?
The cash flow of your business is a measurement of how much cash you currently have on hand to take care of operating activities. Everything becomes harder when you don’t have adequate cash flow, but with the right amount of cash on hand at all times, business activities like acquiring supplies, paying employees, and handling overhead will become straightforward and stress-free.
Your company’s cash flow is in a state of constant flux. As you take care of financial obligations, your cash flow is harmed, and as you take in money, your cash flow is improved. Cash flow is made up of two opposing movements of capital:
- Cash inflows: Any money that makes its way to your business is a cash inflow. The most common form of cash inflow for many businesses is invoice payment.
- Cash outflows: Money that makes its way out of your business is cash outflow.
Your cash inflow and cash outflow need to be in perfect balance to avoid cash flow problems. Ideally, your cash inflow will significantly exceed your cash outflow, which will allow you to save money, reinvest capital in growth, and improve your overall working capital.
Why Is Cash Flow Important?
Cash flow is one of the most important indicators of the health of your business. Without adequate cash flow, your growth potential will gradually drop to zero; most companies that experience long-term negative cash flow eventually go bankrupt and become incapable of further operation.
Healthy cash flow, on the other hand, significantly increases the growth potential of your business. When you think about it, growing your business consists of making a consistent series of daily purchases, and your cash flow is the biggest indicator of whether you’ll be able to handle these necessary expenses as they arrive.
How Can You Improve Your Cash Flow?
There are two different ways you can improve your cash flow:
- Organically: Ideally, you’ll be able to improve your cash flow just by setting different payment terms or keeping a better eye on your cash flow forecast. However, organic cash flow improvements aren’t always enough to get your operating cash balance back in order.
- With financing: There are tons of different ways you can give your cash flow a temporary boost with financing. Some of these options are sustainable over the long term, but others are only appropriate in short-term applications.
Here are a few examples of organic and finance-related ways that you can get your cash flow back on track:
1. Forecast Accurately
There are a variety of different tools you can use to forecast your cash flow. For instance, most types of accounting software are capable of producing cash flow statements, which provide comprehensive data on how your sales and expenses will converge to either benefit or harm your cash flow.
A cash flow statement generated with your accounting software can tell you a lot about how your cash flow is set to evolve in the near future. However, there are also software services out there that focus exclusively on cash flow. This type of software can provide you with a detailed cash flow analysis that ensures you won’t run into any unexpected walls. Cash flow software can also prescribe behaviours and practices that will help you optimise your business and improve cash flow over the long term.
2. Get Your Future Cash Faster
By definition, poor cash flow is a lack of adequate working capital at any given time. Therefore, any measures you can take that will get cash in your hands sooner after the sale will improve your overall cash flow.
For instance, check for any discrepancies between the payment terms you offer and the payment terms your suppliers demand from you. If you’re giving your clients 60 days to make a payment but your suppliers require payment within 30 days, you’re actively setting yourself up for cash flow issues.
While it’s understandable to want to be flexible with your clients, citing a discrepancy between the payment terms you have to abide with and those you offer your clients can give you an excuse to demand faster payment without harming client relations. There are also ways that you can get your hands on the cash you’re owed without having to wait:
- Demand payment upfront: You’ll lose a lot of clients if you simply start demanding up-front cash payment overnight. No matter how skillfully you execute the switch, in fact, you might find that doing business in your industry becomes impossible if you never give your clients extra time to make payments. However, there’s no denying that simply requiring full payment at the point of sale can leave you with a much larger amount of cash in hand at the end of the day.
- Try invoice finance: With invoice finance, you give partial ownership rights to your invoices to a bank or another financial institution in exchange for cash upfront. Most invoice finance providers don’t offer the full 100% of your invoice value upfront. Some innovative web-based providers, however, are starting to turn this trend around by giving you your full invoice value while allowing your clients ample time to make payment in full.
3. Use Business Loans
Taking out a business loan is a short-term solution to cash flow problems that immediately provide positive cash flow. Most types of small business and enterprise loans, however, have high-interest rates and other unattractive terms. It’s dangerous to become reliant on business loans in the long-term; while business credit cards, lines of credit, and other types of lending improve your net cash flow overnight, the interest rates and fees of these finance options can put you in the red in the long term if you aren’t careful.
4. Optimise Your Inventory Levels
It’s important to have enough inventory on hand to fulfill orders. Holding onto too much inventory, however, can negatively affect your cash flow. Keep in mind that your inventory has value, and it cost you money to acquire it. Therefore, the more closely your inventory reserves match your monthly order value, the less cash you’ll have tied up at any given time. Many types of accounting software can help you optimise your inventory.
5. Make It Easier for Your Clients to Pay Promptly
Giving your clients small discounts in exchange for early payment is one of the oldest tricks in the book for getting paid on time. Offering these types of concessions, however, impacts your bottom line, and as a startup or new business, you might want to avoid offering discounts altogether.
As you determine tricks for getting paid faster, remember the main reason that clients don’t like paying upfront in the first place. Doing so can put a strain on your clients’ cash flow, and offering goods and services on terms allows payment to occur when it’s convenient. If there were a way to get paid immediately while giving your clients plenty of time to get their funds together, you’d be able to remove the main disincentive preventing up-front payment while offering the same convenience of invoicing on terms.
Next-generation, web-based financial services have begun offering this win-win situation to clients and suppliers alike. It’s now possible to get paid in full for your orders immediately while still giving your clients plenty of time to pay.
Benefits of Solving Cash Flow Problems
It’s impossible to overstate just how important cash flow is to your business. Just as blood carries oxygen and nutrients to your organs and tissues, cash flow carries money to the various components of your business that require steady inflows of cash to operate.
Cash flow problems are no reason to panic. There are plenty of short-term measures that you can take today to resolve any issues with your cash flow that threaten to harm or sink your business. However, experiencing cash flow problems can be an important learning experience. Which practices caused you to develop an imbalance between your cash inflows and outflows in the first place?
If you don’t resolve the underlying problems that caused you to have cash flow problems, they will appear again and again. Ultimately, it’s best to solve cash flow problems organically by improving your overall sales, optimising your inventory levels, and improving your payment terms.
Keep in mind, however, that the days when finance-based cash flow solutions were only feasible for short-term use are long over. Innovative, web-based finance options are making it easy for clients to rely on long-term invoice financing that provides you the cash insulation you need to solve the underlying causes of your cash flow issues at your own pace.
How Credit Digital Can Improve Your Cash Flow
Here at CreditDigital, we’re well aware of just how important cash flow is to your business. That’s why we offer a cutting-edge service that provides you with 100% of your invoice value at the point of sale. Don’t worry; your clients will still have up to 12 months to pay. We even have 0% interest options available.
CreditDigital is like invoicing with terms without all the potential complications. Instead of waiting 30, 60, or even 90 days to receive payment from your clients, CreditDigital provides you with the full value of your invoices upfront. In this way, CreditDigital is far superior to other forms of invoice financing, which only provide you with 70-95% of your invoice value.
Our next-generation business finance solution is easy to set up and even easier to use. Once your account is active, you’ll be able to add a “Pay with CreditDigital” button to your checkout page. When your clients select this option, they’ll be met with a clean, simple, PayPal-like interface that will perform a quick credit check. Most transactions are approved instantly, and as soon as your client selects his or her preferred payment terms and confirms the order, you’ll receive the full 100% of your invoice value without having to wait.
Your clients will appreciate having up to 12 months to pay their invoices, and you’ll appreciate the cash flow improvements that getting paid on time, every time offer. To make things even easier, CreditDigital assumes full credit control of any orders generated via our platform. From vetting the creditworthiness of your clients to ensuring that payment collection goes smoothly, we take care of the credit control process from start to finish.
Best of all, CreditDigital is a non-recourse type of financing. No matter what happens, you’ll get the full 100% of your invoice value upfront whenever your clients use our platform to arrange payment. With CreditDigital, you’ll never have to worry about cash flow problems again; reach out to us today to get started!
Here are a few examples of related terms you should be familiar with as you determine the best ways to optimise your cash flow:
1. Accrual Accounting
Accrual accounting is when you track your monthly income in terms of sales made instead of cash received. In tandem with cash accounting, which only registers income when you actually receive payment, accrual accounting can give you an idea of the general health of your business and how much money you stand to receive in the next 30 days.
2. Net Income
Net income is the amount of money you’ve made in a particular period of time minus any expenses you’ve incurred. Knowing your net income can give you an idea of how much money your business is saving. This metric also tells you whether your cash flow is positive or negative.
3. Overdraft Finance
Your bank might provide you with an overdraft when your account balance reaches £0. Overdraft finance is a form of short-term finance; overdrafts usually have high-interest rates, and there might be a limit to the number of overdrafts you can make within a month or year.
4. Working Capital
While “cash flow” refers to the constantly-shifting relationship between your cash inflow and cash outflow, working capital is a static sum referring to the total amount of cash your business has at its disposal at a given time. Improving your cash flow will increase the amount of working capital you have at your disposal.
5. Balance Sheet
While balance sheets used to be physical pieces of paper, most companies now use accounting software to keep track of their income and costs. Every time you make an expense or receive payment, you mark this incoming or outgoing cash on your balance sheet to get an idea of your cash flow health and keep track of how much working capital you have on hand.