How to improve your business’s cash flow
To keep your business financially healthy, it’s essential to track your cash inflows and outflows. Here’s why you should pay more attention to cash flow management.
According to a study conducted by Léger, 60% of Canadian SMEs have experienced difficulties managing their cash flow, whether due to delays in invoicing or complications with payments. In a climate of economic uncertainty, as interest rates and inflation drive up the cost of your operations, it’s more important than ever to track your cash inflows and outflows. Despite this, 40% of businesses still rely on manual processes instead of accounting software. Our guide will help you better understand the role of cash flow, identify factors that are affecting your liquidity, optimize your cash flow management and implement strategies to increase cash flow and improve predictability.
What is cash flow management?
Your cash flow represents the money your business takes in and spends over a given period. It can be positive if your cash inflows exceed your cash outflows, or negative if you’re spending more than you’re taking in.
A positive cash flow doesn’t mean you’re making a profit, and even if your business is profitable, your cash flow may be negative at times. With good cash management skills, you should have more than enough cash on hand to cover your day-to-day expenses.
What is a cash flow statement?
It’s a document that summarizes your cash flow – for example, over a one-month or one-year period. It identifies three types of cash flow:
- Operating cash flow: This refers to cash inflows or outflows directly related to your business’s operations, such as sales, rent and other fixed expenses, salaries, purchases, etc.
- Investing cash flow: This refers to your business’s long-term assets and the cash they may generate – for example, the purchase of equipment or sale of a subsidiary.
- Financing cash flow: This refers to the financing obtained by your business, such as loans, debt repayments, dividend payments, etc.
Why is your cash flow important?
Cash flow is the engine that drives your business. It’s what allows you to move forward and achieve your goals. Effective cash flow management ensures you have the liquidity required to stay afloat and cover your ongoing expenses, such as employee salaries. It also gives you the flexibility to make better business decisions and seize opportunities as they arise.
If you mismanage your cash flow, it could harm your business’s growth. For example, you might not have the cash on hand to make a major acquisition or purchase certain equipment. This could force you to borrow more and potentially leave you with big monthly payments due to high interest rates.
Worse still, if your cash flow remains negative for an extended period, your business could become insolvent and be forced into bankruptcy. That’s why it’s so important to manage your cash flow properly.
When should you track your cash flow?
Review your cash inflows and outflows once or twice a week. This is especially important if your business is going through a difficult period.
Many people make the mistake of only tracking their cash flow during tax season. To maintain enough liquidity to keep your business running smoothly, it’s best to keep your records up to date.
How do you project your cash flow?
To plan for your business’s growth and make informed decisions, it’s a good idea to project your cash flow based on historical data. This will give you a better idea of how much cash you’ll have (or won’t have) left at the end of a given period.
Use three scenarios when making your projections: best case, realistic and worst case. In addition to your usual cash inflows and outflows, be sure to include any one-time expenses you expect to incur.
Compare these projections with your actual cash inflows and outflows, and make adjustments so they’re as accurate as possible. This will give you a clearer picture of your business’s financial situation, no matter what happens.
What factors can negatively impact your cash flow?
At first glance, your cash flow may seem to indicate a healthy financial situation. However, certain factors can throw a wrench in your plans and negatively impact your liquidity to the point of preventing you from meeting your obligations. For example:
- Delays in collecting accounts receivable.
- Excess inventory that hasn’t been converted into cash sales or accounts receivable.
- Poorly scheduled accounts payable payments.
How can you improve your cash flow?
Here are a few tips to help you better manage your cash flow:
1. Speed up your cash inflows
- Keep your invoice payment dates as short as possible.
- Establish clear payment terms from the start of the contract.
- Send your invoices as soon as possible.
- Send automatic reminders before and after the payment due date.
- Stay on top of overdue invoices.
- Offer discounts when necessary to speed up payments.
2. Control your cash outflows
- Manage your expenses carefully to preserve your cash flow.
- Review your recurring expenses every quarter.
- Optimize your inventory. While a stock shortage can cause you to miss out on sales opportunities, excess inventory could reduce your cash flow and increase your storage costs.
- If necessary, clear out your merchandise by offering it at a discount.
- Negotiate more favourable terms with your suppliers. For example, a 60- or 90-day payment term without penalties.
3. Bridge cash flow gaps
- Check with your financial partners to see if you can secure better terms, such as staggered or flexible payments that take your revenue cycle into account.
- Consider financing solutions such as invoice factoring to offset your business’s cash flow shortfall.
- Use your line of credit to bridge the gap between cash outflows and inflows. Keep in mind that you’ll have to pay interest and that this solution should be temporary.
→ Read our tips on managing your business’s seasonal cash flow
The benefits of digitizing your cash flow management
Many SMEs still manage their cash flow manually, believing it will save them money. In reality, this approach makes them more likely to experience delays in invoicing, which can negatively impact their cash flow.
If you haven’t already done so, it’s in your best interest to digitize your cash flow processes. Invest in accounting software, use online payment methods and opt for banking tools that connect directly to your bank accounts.
This will help you:
- Save time by reducing manual data entry.
- Gain better visibility into your cash inflows and outflows.
- Speed up your collection cycle.
- Better track overdue client accounts.
- Optimize your inventory management.
Ask for advice
If you’re having trouble figuring things out, don’t hesitate to call in the experts. For example, your financial advisor can help you choose the best digital tools, such as accounting software that’s compatible with your banking platform. With their guidance, you’ll be able to improve your cash flow projections and develop strategies to increase your liquidity, particularly through financing solutions.
As a business owner, building a trusting relationship with your banking partners can make all the difference. By providing them with up-to-date information, you’ll receive personalized advice and financing tailored to your needs. This will put you in a better position to effectively manage your cash flow and make the best decisions to ensure your business’s growth.
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