Tips for Managing Cash Flow

Bertrand Théaud
Published: 01 Sep 2020

What Is Cash Flow And How To Manage It?

Cash flow is the money that is recorded moving (or flowing) in and out of your business account. It is usually reported in a monthly cash flow statement.

If you have more money coming in than going out then your business is in a positive cash flow position, or ‘in the black’. When more money is going out than coming in, your business is at risk of being overdrawn or in debt, you will then need to find alternative sources of income to cover these overdrafts.

Understanding how to monitor and manage your business cash flow is critical to ensure the smooth functioning of your company. That will enable you to tell where your business can make adjustments to ensure it is working towards turning a profit.

Staying in the black is one of the single most important objectives to drive your company towards success. But if your business is not moving forward then we recommend following this guide on useful cash flow management strategies.

How Cash Flow Works

When running a business, it may sometimes feel like cash only flows one way (out of your business), but actually it moves in both ways.

  • Cash coming into the business: this usually takes the form of clients purchasing your goods or services. In a case where clients don’t pay at the exact time of purchases, some of your business’s cash flow will show up in the form of accounts receivable in your cash flow statement.
  • Cash going out of the business: this would namely be payments or expenses to produce your goods or services. This can include a range of expenditures such as rent or a mortgage which need to be paid back in monthly loan settlements. These would show up in you cash flow statement as various forms of accounts payable.

Having control over your cash flow will empower you to spot where your business could be doing better, whether it be in your incoming or outgoing.

Why is Cash Flow So Important?

The lack of cash is one of the primary reasons why businesses fail, according to a paper published in 2020 by the Small Business Administration listing the common causes of business failure.

Cash is particularly important in some business scenarios, including:

  • When starting a business: cash flow problems are more difficult when launching a business, particularly in the first six months. Money has a tendency to fly out of the company faster at the start when you are still setting up your operations but may not yet have many customers or sales. Suppliers do not often offer credit terms to new companies, worried that they will not have the funds to pay them which increases their financial strain.
  • Seasonal work or business: if your product or service is only seasonal (e.g. Christmas themed merchandise) then having a grasp over your cash flow will allow you to make provisions for the large fluctuations in business and essentially income. Cash flow, in this case, will be vital to keep your business afloat during the off-season.
  • Profit does not equal cash: technically, it is possible for your company to turn a profit even if it records no cash. The reason behind this is that profit is just a concept used in accounting, whereas cash is the amount of available money in your business’s bank account. But remember, profit does not enable you to pay bills and meet your financial obligations. Profit will include assets like accounts receivable (money which is owed to your business by customers) which are not immediately collectable and as such are not able to receive immediate cash. Always make sure you have enough cash in your company’s account to pay for monthly and ongoing payments.

A guide to using a Cash Flow Statement

The most effective way to track your company’s cash flow is through a cash flow statement (or report). It enables you to get an overall view of all money that has come in and out of your business’s bank account, and basically to understand your company’s cash position (whether it is positive or negative) every month.

Keeping track of your cash position is much more significant and fundamental to keeping your company afloat.

The statement is normally split into three parts:

  1. Cash from operating activities
  2. Cash from investing activities
  3. Cash from financing activities

In all those parts you will be able to identify every cash transaction (both in and out) that has occurred in your business. Your outgoings will be deducted from your incoming to get your business’s net cash flow.

Simple Methods to Prepare a Cash Flow Statement

  • Use accounting software: certain tools will be integrated to help you to construct a cash flow statement. If you are unsure how to use it, ask your accountant to assist you with it.
  • Find help online: many services are available online to connect you to experts or offer free templates and tools to enable business owners to put together a cash flow statement. Try these templates by Bench or SCORE to get you started.

Why Use a Cash Flow Statement?

  • To track where your business’s money is coming in from
  • To understand where your business spends the most money
  • To get the ‘cash reality’ of your business, as opposed to the abstract accounting
  • To spot a cash inconsistency or shortage and help you plan for future cash flows. The longer you wait to fix a cash shortage the further your business’s cash flow will fall.

10 Tips to Manage Your Cash Flow Effectively

The tips and strategies below can be applied to help improve your company’s cash flow problems.

Tip #1 – Monitor your cash flow on a regular basis

As we mentioned above, it is advisable to prepare a monthly record of your cash outgoings and incomes, at least on a monthly basis. This will ensure that mistakes and cash shortages are spotted quickly and do not cause any damage to your business.

Tip #2 – Cut your costs

Use your cash flow statements to do a cash flow analysis and try to see whether there are any recurring expenses that you could cut back on. They could be in the form of bills on utilities, rent, payroll, subscriptions or frequent services. If you think you need to reduce your expenses, try to cut the costs or negotiate payments where possible.

Tip #3 – Get your customers to pay faster

The best way to do this without upsetting your clients or customers is by offering them sales discounts and benefits to get them to pay faster. For example, if you offer a 30-day credit term, you can give your customers a 5% discount on their invoice amount if the bill is paid within ten days of receipt. If not, the full amount will be due by the end of the 30-day credit term.

Tip #4 – Get cash for your assets

This tip is particularly important if you are looking to make some cash fast. Perhaps your business has some old equipment that is sitting in a storage room collecting dust. Do not let it become obsolete, consider selling it or renting it out to get cash out of it.

Tip #5 – Obtain a line of credit or loan

 Use your cash flow statement to forecast your cash requirements and get a line of credit or loan as a safety net against cash flow problems.

Be mindful about the line of credit or loan you get. Just ensure that whatever money you are borrowing is worth the investment and cost of the loan or credit you are receiving.

Tip #6 – Rent equipment rather than buy it

Avoid tying up cash in big expenditures where necessary, especially when it comes to cars or vehicles, computers and other business hardware. If you can rent it then do so, this means you can hand it back at any point and can quickly change it for the latest model or features.

Tip #7 – Keep up with your invoicing

Design your invoice template so that they become easy and straightforward to fill in. You do not want something that will make invoicing your clients too difficult or cause you to make mistakes.

Another tip is to send the invoices by email so that they do not get lost in the post and get to your recipient as quickly as possible.

Tip #8 – For larger orders or long-term contracts, ask for deposits or partial payments

Asking for a deposit or partial payment means you have some cash to use to purchase the materials you need or to pay the team required to perform the job your business is being contracted for.

It is not uncommon to ask for up to twenty-five per cent deposit upfront before beginning any work on the job at hand.

Tip #9 – Try to delay payments to vendors

It may be worth trying to negotiate more favourable payment terms with your vendors or to figure out how late you can pay them.

Avoid late fees and try to engage your vendors in a transparent and respectful way that honours your working relationship.

Tip #10 – Business credit cards to support your cash flow

Before you take out a business credit card, ensure that there are worthwhile rewards and benefits which you can use towards business-related purchases, such as travel and hotels.

Business credit cards can offer a comfortable cushion when your business is running low on immediate cash, not to mention statements provided by the bank will guarantee that you are able to track all expenses made through any cards you take out.

Keeping track of your business’s cash flow through efficient cash flow management will inevitably help you avoid simple cash mishaps which could cost you your entire business.

Understanding the concept of cash flow is important when it comes to cross-border payments. They are complex and involve a number of costs, including a change of currency, transaction fees and exchange rates to name a few.

Having a snapshot of these expenditures can help you realise where you could be saving money and how your business can grow internationally efficiently. Apply these clever and simple strategies to put your company on the track to healthy cash flow!

Bertrand Théaud

Bertrand Théaud is the Founder of Statrys. His entrepreneurial journey has inevitably exposed him to the difficulty in dealing with banks, especially in Hong Kong. When he realised the number of SMEs going through the same challenging experience, he decided to start Statrys: a digital alternative to traditional banks specifically designed to serve the needs of Asian SMEs and start-ups...

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