What is Cash Flow and Why is it Important?
Simply put, cash flow is money moving into and out of a business. The net result of cash flowing in and out of a business dictates whether a business is cash flow positive or negative. A business keeps track of their cash flow with a cash flow statement, that reports what cash is being used for and recieved from.
It is important for a business to try and increase their cash flow as much as possible, so that they will eventually be able to use that cash to grow their business. Along with expansion, it is important to have good cash flow for when business may slow down, and keeping track of your cash flow statement over time can show you how much cash flow you need to have in your peak seasons to support your slower seasons of businesss. Without proper care of your cash flow you can end up running out of money. Even when your business is making a great amount of sales, it is important to keep track of when you are recieving your payments from these sales. For example, if you are getting payment in Net 90 from your biggest customer and you used all your cash to finance their order, this may hault your business from further production until you get their payment in 90 days. With proper attention to your cash flow statement you can see this issue and plan for bigger orders by saving more cash prior to big orders, or using financial services such as factoring to get your money quickly to continue your business.
Ways to Improve Your Cash Flow
Lease instead of buy
Send invoices out quickly
Get financing from a factoring company
Ways to Improve Explained
- Check inventory: Search through your inventory and see what is moving and what isn’t. Inventory that is sitting holds up your cash, which hurts your cash flow.
- Increase prices: Increasing your prices does not always work, but in cases that customers are willing to pay more, it can mean a world of difference to your cash flow.
- Reduce spending: When your business’s cash flow is hurting, it may be time to look at your spending. Often times when things are going well spending can get a little extra, so make sure to look at where the money is going in your business, and if there is money being spent where it is not providing good return for the business, you need to cut your spending.
- Lease instead of buy: If you don’t have lots of cash sitting around, leasing is a great option. While it can be more expensive in the long run, leasing helps to reduce large payments into smaller payments that are more cash flow friendly.
- Send invoices out quickly: The sooner you get paid, the better your cash flow. By sending out your invoices immediately you can do your part to make sure that you are receiving your payment as soon as possible.
- Get financing from a factoring company: A factoring company is a great way to get your invoice or inventory payments as soon as possible. A factor will get you your payment usually within a few days at a discount, and they will collect payment from your customer. Giving you a big boost to your cash flow, while giving your customers the payment periods they like.