How to Optimise Cash Flow for Your Small Business and Why Cash Flow is Important

Just about every business owner should want to be bringing in more money than they spend. After all, a positive income with profits keeps the business afloat and keeps everyone productive and happy. Just looking at your revenues, however, isn’t an indicator of how well your business is doing, especially if you’re spending more money than you’re bringing in. Understanding cash flows is essential for all business owners, at the very least at a very basic level.

What is Cash Flow?

A Cash Flow Statement shows both cash inflows and cash outflows of items including sales revenue, investments or loans made, bills and utilities that must be paid, salaries and payroll, and much more.

A positive cash flow means that your business is generating more cash inflow than cash outflow, whereas a negative cash flow is when your business generates more cash outflow than inflow.

Why Cash Flow Matters for Small Businesses

For the vast majority of businesses, especially small businesses, cash flow is essential and is often used as an indicator of the financial health of a business.

Failing to monitor cash flows can result in some key issues which are particularly relevant to small businesses, including not having enough cash to to pay employees on time which may lead to litigation and a breach of labour laws. In addition, failure to pay suppliers or utility providers on time could lead to having the lights turned off in your shop or no product to stock the shelves with, for example.

Cash Inflow vs Outflow

The two main ways of measuring cash flow within a business are the inflows and outflows. Cash inflows can come from sources such as business revenue, accounts receivable, and yields on investments, for example.

Cash outflows include things like paying salaries and payroll, utilities, paying loans and interest, purchasing inventory and paying suppliers, and other related expenses. Simply, it is the amount of cash flowing out of the business in the short and near-term, e.g. monthly or seasonally.

Tips to Optimise Cash Flow

There are many strategies that can greatly improve the efficiency of cash flows within a business, most of which depend on your business’ specific circumstances and are best outlined by a qualified accountant.

Generally, some tips to improve cash inflows include adjusting payment methods and invoicing, determining the best strategies for dealing with delinquent or overdue payments, and/or offering incentives for cash or early payments.

For cash outflows, it is essential to have a budget in place as well as accurate records for all outflows, including expenses. Negotiate with suppliers for discounts on early payments, for example, or consider bulk purchases of product as appropriate to save money. You may also be able to negotiate discounts with creditors for larger payments or refinancing loans.

A combination of the above tips can greatly improve the efficiency of your business cash flow activities and lead to satisfied customers, suppliers, creditors, and a healthier business overall.

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Read Also – 5 Reasons to Maximise Cash Flow Management for Your Business