Cash flow is important in business operations. It is the amount of money that “flows” in and out of a business over a period of time. It refers to the liquid funds available for a business to cover expenditures such as rent, utilities and staff salaries. Cash flow is crucial for any business to meet pending financial obligations and also plan for the future.
Unfortunately, cash flow remains a challenge for many businesses. In some cases, these businesses are actually thriving but have not put a system in place to help manage their cash flow. In this article, we recommend five sustainable methods to improve your cash flow.
5 sustainable recommendations to improve cash flow in your business
- Look out for spending loopholes and block them
- Have policies that encourage quick payments
- Know your list of accounts payable or trade payable
- Carry out an audit of historical patterns in your cash flow
- Sell what’s in demand / Increase your pricing
1. Look out for spending loopholes and block them
Businesses often have spending loopholes that can go on for many years if not found out. An example can be something as trivial as buying an item that could have been produced for much cheaper or something more serious like employing more staff than the company actually needs. The latter often results in companies laying off employees, which can lead to a bad reputation.
This is why it is important to constantly align business decisions with the cash flow the business needs per time. Once you find a loophole in your business that is costing you money and negatively affecting your cash flow, you should work towards blocking it.
2. Have policies that encourage quick payments
If your business relies heavily on customers paying for goods and services on time, then you should make policies that ensure that. You do not want a case where you’re relying on an inflow from a sale but the customer fails to pay as when due. Ensure your business has contracts that state the maximum time limits on payments.
3. Know your accounts payable or trade payable
As the name implies, your accounts payable is the total of your company’s debts or obligations to another company or institution. For example, as a manufacturing company, you may owe your suppliers money for items already delivered.
While trade payable is the money your company owes vendors for inventory-related goods. For example, a supermarket may currently owe its suppliers for hair products that are already in stock.
It is important to know all accounts payable or trade payable in order to have clarity on how to pay up in a way that does not affect your cash flow. Imagine “suddenly” realizing that your company needs to pay large sums of money; that will affect the liquidity needed for a good cash flow.
4. Carry out an audit of historical patterns in your cash flow
One of the best ways to plan for your cash flow is to look through your financials for historical patterns. This will give you an idea of your expenses, salaries, purchases, tax remittances, etc so you can know how much is needed to run the business. When all these factors are considered, your excess cash can then be invested.
Additionally, having clarity on your historical cash flow pattern helps you to have the clear foresight needed to maintain a good cash flow for the future.
5. Sell what’s in demand and increase your pricing when necessary
Business owners often make the mistake of continually stocking goods that are low in demand, as well as sticking to low prices that stunt the growth of the business. Both of these mistakes will negatively affect cash flow because the business will have to hold items in stock for much longer than necessary (when demand is low) and also battle with low inflows due to low pricing of goods or services.
These recommendations when implemented will help improve cash flow in your business.
Simply ensure you make informed decisions and not emotional ones when it comes to your business and the cash flow it needs to run its day-to-day processes.