Cash Flow Management Strategies

Introduction

Making a profit is considered to be the main ingredient to a company’s financial success. However, a company’s profits can become insignificant if there is also not enough positive cash flowing through the business. Lack of cash flow can impact all areas of a company, including employment, inventory purchases, expansion projects, and more.

According to a study done by U.S. Bank, 82% of small businesses that fail cite poor cash flow management skills and/or poor understanding of cash flow as a reason that their business failed. Because of this, it is of dire importance for all business owners, especially small and medium-sized business owners, to understand what cash flow is and how to manage it properly.

What is Cash Flow?

According to Investopedia, cash flow is the net amount of cash and cash equivalents being transferred in and out of a business. This amount can be tracked weekly, monthly, or quarterly. Assessing the amounts, timing, and uncertainty of cash flows, along with where they originate and where they end, is one of the most important aspects of financial reporting.

Cash flow can be positive or negative. Positive cash flow means that you have more cash flowing into your business than out of it. The more positive cash flow your business has, the easier it is to perform day-to-day operations and grow your business.

Negative cash flow means that you have more money flowing out of your business than into it. If your cash flow is negative, your company should work towards a positive cash flow.

5 Options for Cash Flow Management

Maintaining a positive cash flow requires work and consistent management. Luckily, there are a number of options available to help you achieve this:

1. Increase Margins

One way for business owners to maintain a positive cash flow is by increasing margins. This can be done by charging more for your services and/or products. Margin increases can also be achieved by decreasing the costs involved in creating your services and/or products.

While this is a viable option, companies should be wary of making cuts that will negatively impact customer satisfaction. If increasing prices or downgrading the quality of products will be detrimental to your business, we recommend that you find another way to increase your positive cash flow.

2. Postpone, Sell, and Lease

Sometimes, the best way to increase your cash flow is by simply cutting back. If there are any projects or expansions that your business can afford to put on hold, set them aside until you are in a better financial situation.

Additionally, if there are any materials or equipment that your company is not using, consider leasing or renting them. It’s possible that you could make regular income on the side by leasing, or could receive more money upfront for selling.

3. Renegotiate Payment Terms with Vendors

Another option for increasing positive cash flow in your business is the renegotiation of payment terms with your vendors.

For example, if your vendor typically requires payment a week after the invoice date, see if this can be changed to 30 days or even 10 days. The worst your vendor can say is no, so you might as well see if this is a possibility for you.

4. Cash Flow Loan

Though loans can seem daunting, they are a viable option for increasing positive cash flow. According to Investopedia, a cash flow loan is a type of unsecured borrowing that is used for the day-to-day operations of a small business. This loan is used to finance working capital, such as payments for inventory, payroll, and rent, and is paid back with incoming cash flows of the business.

While a bank loan is dependent on a company’s credit, a cash flow loan requires the lender to assess a company’s cash flow generation capacity. Because of this, the origination fee, or the upfront fee charged by a lender to process a new loan application, is typically higher than a traditional loan.

5. Factoring

According to Faktorama, factoring is a corporate finance technique that enables a business to do at least one of two things:

• Transfer the credit risk of accounts receivable to a third party.
• Leverage accounts receivable to accelerate working capital through the sale of accounts receivable to a third party.

A bank loan requires businesses to take on debt and sets a strict timeline of when the borrowed money should be repaid. However, with factoring, the lender pays the business upfront for their invoices at a discounted rate. The customers for that business will then pay the lender back directly. Because of this, factoring provides business owners with loan-free, immediate payment.

To learn more about how inventory factoring can benefit your positive cash flow, click here.