Cash Flow: Why it’s Important and How to Improve it

Last Updated: 

February 9, 2024

In the modern age, many of the brilliant entrepreneurs starting their own businesses have never studied business or finance at any point in their lives. This isn't a problem per se, especially since diversity in mindset is what makes the current landscape of business so fascinating. However, there are key concepts that, as a new entrepreneur, you need to know. Cash flow is one of these, and this article aims to explain how it works.

Key Takeaways on Improving Your Cash Flow:

  • Invoice Promptly and Follow Up: Speeding up the invoicing process and diligently following up on payments can significantly improve cash inflows.
  • Manage Inventory Efficiently: Keeping inventory levels optimised ensures that cash isn't tied up unnecessarily, improving liquidity.
  • Extend Payables, If Possible: Negotiating longer payment terms with suppliers can help keep cash longer within the business.
  • Review Pricing Strategies: Regularly assessing and adjusting pricing can help maintain or improve profit margins, positively affecting cash flow.
  • Control Costs: Identifying and cutting unnecessary expenses can free up cash, contributing to a healthier cash flow.
  • Consider Financing Options: Accessing lines of credit or other financing solutions can provide a cash flow buffer during lean periods.
  • Offer Discounts for Early Payments: Encouraging customers to pay their invoices early by offering discounts can accelerate cash inflows.
  • Conduct Regular Cash Flow Analysis: Ongoing analysis helps identify trends, enabling better planning and decision-making to maintain positive cash flow.
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What is Cash Flow

In simple terms, cash flow is simply the movement of money, or cash, in and out of your business. This cash can take the form of actual money, but also assets and other items of value that are worth a certain amount to your business, such as stock. Cash flow is generally broken down into inflows, movement of cash into the company, and outflows, movement of cash out of the company, and your cash flow is seen to be good if your inflows consistently outweigh your outflows.

Why Good Cash Flow is So Important

Cash flow is a really important concept in business, particularly because it can explain some of the more challenging issues a company can find itself with. The importance of good cash flow cannot be understated, because poor cash flow will almost always be devastating to your business.

The Dangers of Poor Cash Flow. Poor cash flow is how a business can go bankrupt, even when it is making a lot of sales. At its core, cash flow is more than just balancing revenue and costs; it is also about timing. If your timing is poor, then your cash flow can become very dangerous to your business. For example, if you have recently made several sales, but aren’t expecting to be paid for them for a week and meanwhile your bills are due in three days, that is a problem. Your outflows will end up higher than your inflows at that point and you could even lose your business.

How to Improve Your Cash Flow

Knowing this, how can you ensure that your cash flow is as good as it can be? Fortunately, you have a few options.

Bill Payment Services. The first is to invest in a bill pay service. These are fantastic services that not only help to ensure you pay bills on time, but also allow you to break up your payments into smaller chunks over time. This is brilliant for your cash flow, as it allows you to spread your outflows around and overall boosts the financial health of your business.

Send Invoices Immediately and Reward Early Payments. Another way to boost your cash flow within your business is to send invoices as quickly as you can and to offer incentives for early payments, such as reduced rates. This will keep your inflows coming in quickly after sales and help you to avoid large periods without inflows into your business.

Outsourcing Your Finances

Finally, if all of this seems too complicated or intimidating to get your head around, then remember there are always options when it comes to business. If you don’t want to, or can’t, figure out how to properly run your business’ finances, then you might want to consider hiring someone who can.

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