How to Improve your Cash Flow Management

How to Improve your Cash Flow Management
Find out ways to improve your cash flow management and the importance of it. Understand what causes cash flow problems and how to avoid them.
by Mary Hohn Feb 01, 2019 — 5 min read
How to Improve your Cash Flow Management

When you’re a business owner, cash flow is your lifeblood. To keep your business operating smoothly, it’s essential to ensure you have more money coming into your business than going out.

And while effective cash flow management is fundamental to a business’ success, it’s not uncommon for business owners to struggle with cash flow problems. In fact, 44 per cent of businesses fail due to cash problems. In other words, if you’re worried about cash flow management, you’re not alone.

To help you stay on top of it, we’ve broken down the basics of cash flow management and put together tips so you can ensure financial health for your business.

What is cash flow management?

Cash flow management refers to the process of tracking money that comes in and out of your business. By tracking these funds, you can forecast how much money will be available to your business in the future, and how much you’ll need to pay in expenses.

To help you manage your cash flow, it’s critical to reference your cash flow statement, which is used to report the cash generated and spent during a specific accounting period.

Why cash flow is important for business?

It’s important to pay close attention to cash flow each month to ensure you have sufficient cash on hand to pay operating expenses such as payroll and suppliers. If you don’t have access to cash, you can end up with unpaid bills and late salary payments for employees.

To avoid this, you need to carefully manage your cash flow each month to focus on creating a positive cash flow, meaning you have more money entering your company than leaving it each month.

A cash flow statement gives you insight into where money is coming from, when it’s coming in, and how it’s being spent, so you can analyse your company’s financial status and budget for the future.

4 common misconceptions of cash flow management

When it comes to cash flow management, there are a few common misconceptions that can be misleading for business owners, including:

What causes cash flow problems?

There are a number of issues and bad business decisions that can negatively affect cash flow and increase business risk. Some of the most common causes of cash flow problem examples are:

Staying in the clear—the secret to effective cash flow management

To avoid cash flow issues altogether, it’s best to use proactive cash flow management strategies and tools, such as:

By incorporating these preemptive measures, you can take charge of your finances and work towards a healthy cash flow for your business.

How to improve cash flow for your business

There are several ways you can consider to improve your business cash flow and overall take back control of your cash flow management.

1. Consider leasing

Purchasing new office furniture, IT equipment and other infrastructure is a significant outlay and uses up lots of cash. When you lease equipment, you can pay for it in instalments and claim the costs on your tax return.

2. Offer payment incentives

Giving your customers a discount or other benefits for paying off their accounts can bring advantages for both of you. When customers are motivated to pay you as soon as possible, you will see the cash flow coming in.

3. Be careful with your credit

If you are offering credit for your goods or services, it makes sense to be cautious. Where possible, get a credit check or partner with a company that can do this for you.

4. Ensure you have adequate stock control systems

Stock that sits in a storeroom and is hard to shift is tying up a lot of potential cash flow. Make sure you keep a close eye on inventory figures and address any emerging issues quickly. If you have a lot of products that just aren’t moving, be prepared to discount them to get the cash moving again.

5. Assess your market

Expanding your product range or service offering can give you some quick wins with new streams of cash flow. Look at value-add options such as gift vouchers, branded merchandise or even products you can personalise for your loyal customers to improve cash flow options.

6. Don’t delay on invoicing

If you only have the capacity to invoice infrequently, it’s time to take action to get on top of your accounting processes. Creating and distributing invoices promptly shows your customers you are running an organised and efficient operation. Make sure the trading terms are clearly stated and make the due date very clear.

7. Provide clear and easy to understand invoices

You want your customers to receive your invoice and pay right away. Make sure your invoices clearly details the products or services provided. Offer a variety of payment options if you can. This makes the payment of invoices easier for the customer and will improve business cash flow.

8. Create a system for reminders

Unpaid invoices can cause major cash flow hold-ups. Communication is the key when it comes to reminder notices. Be firm, be fair and make sure to reach out to customers with unpaid bills. If you have repeated late payment offenders, you may need to start charging late payment penalties or fees.

Mary Hohn
Mary Hohn writes for Square, where she covers topics that affect business owners — from starting a business to growing a business — and the tools and technology that help them succeed.


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