A Practical Guide to Improving Cash Flow

Introduction

Importance of Cash Flow

Cash flow is the lifeblood of any business, representing the net balance of money moving into and out of a business at a given time. Proper management of cash flow ensures that a business can meet its financial needs, invest in growth opportunities, and maintain stability during difficult times. Positive cash flow allows businesses to scale, while negative cash flow typically leads to issues, even if the underlying business is profitable.

This guide aims to provide small and medium-sized enterprises (SMEs) and startups with practical tips to improve their cash flow. By implementing these ideas, businesses can improve their financial health, support sustainable growth, and tackle risks associated with cash shortages.

Understanding Cash Flow

Operating Cash Flow: Cash generated or used in the core operations of the business. Typically, sales of products or services.

Investing Cash Flow: Cash generated or used by investments in assets like property, equipment, or securities.

Financing Cash Flow: Cash inflows and outflows from financing activities, including loans, equity funding, and dividend payments.

A cash flow statement is a financial document that provides a summary of the cash inflows and outflows over a specific time period. It contains the three main types of cash flow: operating, investing and financing. Regularly updating and staying on top of cash flow statements helps businesses understand their cash flow position and make informed financial decisions.

Strategies to Improve Cash Flow

Implement a Robust System to Track Cash Flows

Start by implementing a good system and set of processes to track your cash flow at a high level of detail. Typically, most modern cloud accounting systems do a good job of this. Without this in place, it’s very difficult to make informed decisions to improve your cash flow performance.

Accelerating Cash Inflows

Invoicing Promptly and Improving Receivables Terms: Issue invoices as soon as you can relative to the timing of delivery of your products or services to reduce the time taken to receive payments. Also, always be on the lookout to engage your customers in discussions on how you can shorten or otherwise improve your receivables terms with them.

Implementing Early Payment Incentives: Offer discounts to customers who pay their invoices early, encouraging quicker payment.

Utilizing Online Payment Solutions: Provide multiple payment options including various commonly used online payment systems to make it easier for customers to pay promptly and securely.

Tracking and Following Up on Invoices: Ensure you have a system in place (typically your accounting or invoicing system should have this) to track the payment status and aging of your invoices so that you can promptly follow up with customers. If you have bad debt, that you haven’t been able to collect for a long time with churned customers, then consider selling your receivables to a debt collector.

Managing Cash Outflows

Be Strategic About Taking on Fixed vs Variable Costs: It is important to map out your cost structure in order to understand to which degree your costs are fixed vs variable. Many costs can be taken on by a business in a fixed form or a variable form. As a simple example, you can take a software subscription and pay for it on a monthly basis or pay for it annually. A higher proportion of variable costs can help you handle volatility better and ensure you stay cash-flow positive.

Prioritizing and Scheduling Bill Payments: Organize bill payments based on priority and due dates to manage cash outflows. Try to pay as close to the due date as possible and not as soon as you receive the invoice to delay cash outflows.

Negotiating Better Terms with Suppliers: Prioritize your suppliers by size and do some research with other customers of the supplier to understand what payment terms they are getting. Also talk to other similar suppliers and check what payment terms they offer. Use this information to talk to your suppliers about extending payment terms, giving you more time to pay.

Controlling Operational Costs: Typically it’s a good idea to review your financials in detail every month to go through all your sources and uses of cash. Be aggressive here with cutting non-value add expenses to conserve cash.

Optimizing Inventory Management

For businesses with physical products, improving your inventory management is a critical capability which can have its own deep dive. But, here are a few high-level initiatives to look into. 

Improving Inventory Turnover: Increase inventory turnover by reducing excess stock and focusing on high-demand products. Try to have as detailed information as you can on each individual product and location and plan your inventory investments as optimally as possible.

Just-in-Time Inventory Systems: Implementing just-in-time inventory systems to minimize holding costs and reduce wastage. This can be especially transformative for companies dealing with products which have a short shelf life. 

Accessing Financing Options

Short-Term Financing Options: Do your own research or use a Fundraising Advisor to understand the types of financing options available to your business. Explore using lines of credit, invoice factoring, or short-term loans to improve your cash flow.

Long-Term Financing Strategies: For significant investments or expansion plans try to secure long-term financing where the duration of the financing matches the time it will take to realize returns from the investments or expansion plans.

Cash Flow Forecasting

Accurate cash flow forecasting helps businesses anticipate future financial needs, plan for growth, and avoid cash shortages. It provides insights into potential cash flow issues, letting you manage these issues proactively.

Steps to Create a Cash Flow Forecast

1. Collecting Historical Data: Collect past financial data in as much detail as you can. Typically, the past 12 to 24 months is a good place to start. Analyze it to understand the trends and patterns in your cash flow performance.

2. Estimating Future Cash Inflows and Outflows: Armed with this detailed historical analysis create a forecast of your future cash flows by integrating it with your forward looking estimates of revenues and costs.

3. Regularly Updating and Reviewing Forecasts: At least once a month compare your actual cash flow performance with your forecast and update future forecasts to improve your accuracy over time.

Technology and Tools for Cash Flow Management

Accounting Software

Typically the first place to start. Try and choose an option which includes real-time tracking, automated invoicing, and expense management. Examples include QuickBooks, Xero, and FreshBooks, which offer comprehensive tools for cash flow management.

Expense Management Tools

For larger companies especially, if you have a large number of employees, then it might be a good idea to get a tool specifically designed to monitor and manage business expenses. Examples include Expensify, Concur, and Ramp, which help you monitor expenses and as an added benefit integrate into most accounting software.

Conclusion

Start by ensuring you have your systems in place so that you can track cash flow at a high level of detail. Once you have this in place, improving cash flow involves accelerating inflows, managing outflows, optimizing inventory, leveraging financing options, and using technology for better control and forecasting. A Fractional CFO Service like we provide at Alehar, can help businesses manage cash flow better, so get in touch with us if you’d like to talk about how we can support you.

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At Alehar, we're deeply passionate about M&A and fundraising, equipping us with the expertise and extensive network needed to carry out transactions efficiently and represent the interests of our clients effectively. Our expertise is particularly valuable for transactions ranging from USD 3m to 200m, as we guide companies through every step of their M&A and fundraising journey (including both equity and debt transactions)