How to improve Cash Flow:

Cash flow can decide whether your business can pay its operating expenses and how you plan for growth.

If you overlook its importance, you can quickly get into trouble. For example, if you don’t have enough funds to pay rent, bills, and your people’s salaries, your business will – even in the best of times – struggle to stay afloat.

So, let’s start from the very beginning: what exactly is cash flow?

What is cash flow?

In simple terms, cash flow indicates the movement of money in and out of a business over a specific timeframe.

Any funds received are known as cash inflows, whereas money spent represents cash outflows. Cash inflows typically come from sales, investments, and financing. Outflows cover things such as bills, payroll, and inventory costs.

When you have positive cash flow, it means that the money coming in is larger than the amount leaving your company. This is a great position to be in as it allows you to settle loans, invest in your operations, and drive your business forward.

On the flip side, negative cash flow is when the opposite is true. Sustained periods of negative cash flow can have a significant impact on your business’s financial wellbeing, making it harder for the company to cover expenses such as rent, bills, and salaries.

Cash flow statement format

A cash flow statement (CFS) shows the inflow and outflow of cash, offering insight into how a company is operating and providing details on its overall financial health. 
The CFS includes information on where a business’s money comes from, as well as how and where its cash is being spent. This is useful for business owners, creditors, and investors to determine how much cash is available and whether the company is on solid financial ground. 
The CFS document usually has three different sections:

• Cash from operating activities – This section focuses on any funds generated from core business activities, such as sales and received payments. It also includes operating outflows like rent, utility bills, salaries, and inventory purchases
• Cash from investing activities – This section reflects any cash used for investing purposes. This might include acquiring or disposing of assets such as property or equipment, as well as any profits generated from selling specific investments
• Cash from financing activities – The third and final section highlights money received through loans, shares, or owner investment. It also details cash spent on loan repayments or dividends distributed and paid to other shareholders.

Now that we’ve covered the basics, let’s look at some cash flow examples to put things into perspective.

For instance, how do businesses in the retail and service sectors calculate and keep their cash flow in check?

Cash flow in retail

In the world of retail, cash flow calculations are relatively intuitive. Cash flow in retail is mainly influenced by sales revenue, inventory purchases, and other operational expenses – and it’s all about timing.  

Let’s take a clothes shop as an example. In the space of one month the shop invests £5,000 in stocking up on shirts, trousers, and so on. Initially, this will reduce its cash flow by £5,000.  

If the business then sells products for £15,000, its cash inflow will amount to £15,000. Subtract the inventory costs from this figure and you’ll have a monthly gross cash flow of £10,000. 

On top of stocking expenses, you will need to add other outflows such as bills, rent, and salaries. Of course, this will further affect your cash flow, but – once all this has been considered – you’ll have a clearer idea of how much money you have left.

Service industry cash flow

When it comes to the service industry, keeping a healthy cash flow can be a bit trickier.

In the case of consulting firms, for example, cash inflow tends to come from client project fees which are often received once the work is completed. Cash outflows are represented by things such as salaries, office costs, and marketing expenses.

Cash flow challenges for consulting firms usually arise from the fact that client payments – for whatever reason – can sometimes be delayed. This means budgeting is crucial to make ends meet each month and keep operations ticking over as standard.

To limit the impact of delayed payments and cash inflow problems, it’s always wise for businesses in the service sector to prepare for such eventualities. This could include invoicing clients in a timely fashion, offering discounts for early payments, and keeping money aside to cover operational costs.

Having strategies in place to improve your cash flow can make a true difference to the wellbeing of your business – and even more so in the current economic climate. 

So, what can you do to keep your cash flow healthy all year round? Here’s some helpful tips to take into consideration.

Cut costs

Cutting costs, where possible, is always an effective way to look after your cash flow, ensuring you have enough funds to fuel your company operations and concentrate on getting your business to the next level.

Take time to review your operational expenses and identify opportunities to limit your outflows. However, make sure to carefully think things through to avoid hurting specific areas of your business.

Practical ways to reduce your expenses include minimising your energy consumption. Anything from turning off unused equipment to limiting waste can have a beneficial effect on your company’s pockets from day one.

What’s more, consider reviewing contracts with your vendors and suppliers. If you’ve developed a good relationship with them over time, you might be able to renegotiate your contract terms and secure better rates.

Increase revenue

Increasing revenue is often a way of boosting your cash flow. Yes, it’s easier said than done, but there are some ideas to keep in mind that can help improve your cash inflows.

For example, enhancing your marketing efforts could be a great route to enter new markets, open your services to different audiences, and attract more potential customers.

Also, think about making the payment experience as easy as possible for your clients, especially online. Offering your customers a range of online payment options, such as accepting credit cards, debit cards, or mobile payments, will encourage them to complete their purchases.

Introducing loyalty programmes and focusing on good customer service can also do wonders for your cash flow. They can both lead to increased repeat business and, in turn, higher revenues.

Manage assets and liabilities

Managing your assets and liabilities is another way to improve your cash flow. This involves efficient invoicing and follow-up measures, inviting customers to pay for their services in a timely fashion.

It also includes optimising your inventory levels to avoid over- or understocking, as both scenarios can affect your business revenue and potentially cause a loss in profit. To do this, you may want to invest in tailored tech tools and software that can streamline the process and keep you up-to-date with stock levels at all times.

When it comes to managing assets, Metro Bank give you a helping hand. We offer a range of services that allow you to fund new assets and equipment, meaning you can keep growing your business without the risk of investing more than you can afford.

Of course, the aim of all businesses is to maintain a consistent positive cash flow.

Cash flow management can help you keep track of all the money going in and out. But what should you do to make everything tick as it should?

Forecasting techniques

Creating a cash flow forecast with regular and precise cash flow projections can help you pinpoint potential cashflow problems before they arise.

You can start by writing down a list of assumptions on which to base your predictions – here’s two of the main ones:

1. Are raw materials likely to increase or decrease in price over the coming months?
2. Do you expect seasonal sales to go up or down?
   

Based on your answers to these questions, you can start to plan accordingly.

For instance, if you expect raw material prices to increase, you may have to think about charging your customers a little more. Likewise, if a particularly promising season – sales-wise – is coming up, you may want to ensure your inventory is adequately stocked and maximise your profits when the time is right.

In your projections, you should consider other changing outgoings, such as pay rises and increases in bills and rent.

Utilising financial products: credit cards, overdrafts, and term loans

Making the most of financial products on the market can help you manage your cash flow, too.

The reality is that, in the world of business, income can fluctuate for many different reasons – and often these reasons are simply out of your control.

Depending on your financial situation, credit cards, overdrafts, and business loans can provide financial lines during cash flow shortages.