A key piece in the financial planning of your business involves paying close attention to its cash flow. To put it simply, having a positive cash flow means having more cash coming in (as a result of investments or product sales) than cash coming out (expenses and bills). Managing your cash flow is not always straightforward -- it requires focus, strategizing and planning. So how do you make sure that you have a positive cash inflow at the end of the month? If you are looking for tips on cash management, our experts are here to help.
How to Improve Cash Flows for Business Owners
With the goal of improving cash flow of your business in mind, here are six financial planning tips to get you started.
Regularly Monitor Your Cash Balance
If you want to succeed in today’s competitive business climate, your company must adopt the best practice of regularly monitoring its cash flow. Consider the scenario in which your business is faced with a cash flow problem that could have (easily) been predicted. However, as a result of going unnoticed you will have to improvise or pivot in order to improve or secure additional business financing.
The equation behind all of this is simple. Inflows of cash from sales, investments, or other sources are offset by cash outflows such as marketing expenses, payroll, and other capital expenditures. Many businesses thrive when the inflows > outflows, which creates a cash surplus. According to Harvard Business School: “Having an excess of cash allows the company to reinvest in itself and its shareholders, settle debt payments, and find new ways to grow the business.”
Expanding on the above, a positive cash inflow ensures that your company can pay all of its incoming bills and business operations can go undisrupted. Further, one must not confuse a positive cash flow with profitability. Your business can be profitable without being cash positive, and vice versa, you can also have a positive cash flow without being profitable.
Managing a positive cash flow does not come without challenges, and it must become a priority, especially if you are a SaaS CFO or FP&A manager. First, it's important to map out your business’ capital requirements and monitor both the income and outgoing cash. This process can be streamlined by having the right financial automation tools. With automated accounting processes and reporting you can gain immediate and real-time visibility on the outflows and inflows of your cash, allowing you to identify any spending issues, stick to your budget, and gain a clear understanding of the performance of your business going forward.
Increase the Speed of your Invoicing and Receivables
One way to improve your cash flow management, is to work on streamlining the invoicing and receivables processes. In a nutshell: the objective is to encourage your clients to pay you faster so you have better control over your money.
Begin this process by sending out your invoices as soon as the current billing cycle closes, giving your clients more time to send their payment. This ensures that your outstanding invoices are paid by the end of the month.The best case scenario is for you not to charge via invoicing to be paid 30-60 days after service. Instead, charge upfront via direct debit or credit card. To further optimise this invoice financing process think about the following suggestions:
- When you send out an invoice, make sure that it’s easy to read, it clearly shows the due date, and lists the payment terms.
- Use invoice automation tools to reduce the time spent by your accounting and finance teams.
- Reduce friction in your payments process, i.e.,through online payments, ACH transfers, checks and electronic payments.
- Offer marginal discounts to incentivise early payments.
- Ask for partial payments or deposits upfront.
Anything you can do to increase the speed at which you receive revenue, the better for your business. The more quickly you receive payments, the more money you’ll have on hand to use as needed.
On the flip side, it’s also critical that you’re consistently monitoring when you need to pay out vendors. By spreading out your vendor payment dates, you can ensure you’re not paying everyone at the same time each month. This allows you to avoid having a sudden massive cash outflow.
Cutting expenses is a major factor to consider when improving cash flow operations. Monitoring your expenses is a critical part of cash flow management. Being able to reduce the operational costs of your business can come a long way. Even if your company continues to grow its sales pipeline month over month, letting operational expenses get out of control is not an option. It leaves you exposed to market shocks such as exponential cost increases or unforeseen events (Covid-19).
Begin by identifying the areas of spending in which you can reduce expenses to support your business cash flow. A good way to start is by evaluating each department by its ROI. From there, turn to hiring practices - are you hiring only when necessary? After you have identified the clear-cut places to reduce costs, start thinking about the less obvious ways in which you can improve each department's cash flow. For example:
- Review your rent or mortgage and find room for renegotiation
- Consider your travel and entertainment expenses
- Eliminate discretionary spending
- Outsource where possible
Once again, automated cash flow management can optimise your workflows by offering both high-level and low-level analysis of your various expenses, allowing you to zoom in on where your cash is going and the impact this has on your balance sheet. This will enable you to make strategic insights by directing your healthy cash flow toward ROI positive channels.
Lease Equipment Instead of Purchasing
All businesses rely on equipment and capital assets to operate. However, for some companies, it may be more cost effective to lease or rent the equipment as opposed to the sunk cost of acquiring it. Leasing equipment may be an easy way to improve your business cash flow over time. As companies transition to a dynamic or remote-first work policy, creating a flexible plan can give your business the freedom to periodically reevaluate both your cash flow and budget.
Before making any decisions, determine the effect that leasing or purchasing is having on your ROI. Depending on the numbers, you can either continue leasing or opt to purchase.
Maintain Excellent Business Relationships
Maintaining customer and vendor relationships is one of the most important tasks for any business. If you're looking to create an improved cash flow, consider strengthening your current business relationships. Despite the introduction of tech enabled processes, a lot of these workflows still require fostering a relationship with customers or vendors. As a result of these relationships, you can help ensure reliable sales and a positive cash flow.
The foundation of customer relationship management comes down to frequent and clear communication, and the delivering of results. According to Marshall Freeman: “With trust you generally acquire loyalty between you and your customer. This can be crucial when you experience late payments, as customers are generally more encouraged to make payment on time if they have a strong relationship with a vendor or key contact they deal with on a day to day basis.”
Nurturing your business relationship with clients, vendors and lenders not only helps your business grow, but in times of tight cash flow, they are far more likely to work with you.
In the past, keeping tabs on cash flows involved using manual accounting-based processes, which were error-prone, time-consuming and would create an arduous and frustrating process for the employees charged with overseeing the completion of these rote tasks.
Luckily, times have changed and managing your cash flow should not continue being a demanding process. Now there are even excel alternatives to help streamline your financial forecasting and planning processes. Expense management software can help you monitor your cash flow in real-time, allowing your financial planning team to make better strategic decisions backed by accurate numbers. Ultimately, allowing you to not only monitor your cash spend in real time, but also predict recurring expenses to actively manage your forecast.
Ideally you want to use tools that can provide you with a better understanding of where your cash is going, where it’s coming from, and where it could best be put to use. If you are looking to ramp up your cash flow planning, a finance automation tool can be the perfect addition to your current processes.
With the right financial planning tools, it becomes much easier to monitor, control and strategize how your company spends and earns money.
With Abacum, we empower finance teams of high-growth tech companies to become true strategic partners in the organization by driving time-to-insight with powerful automation and seamless collaboration. Request a demo now to see the product live and start your own transformational journey.