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Accounting
Jan 3, 2024
In simple words, cash flow is the net amount of the cash that flows in and out of a business. It is the running cash that is needed by a business to regulate its normal activities like purchases, sales, profits, losses, and even investments.
The basic equation for cash flow is expressed as:
Cash Flow=Cash Inflows−Cash Outflows
Where:
Cash Inflows include all the money entering the business, coming from various sources such as sales, investment income, loans, and other cash infusions.
To delve deeper, you can categorize and calculate cash flow in three main areas:
Operating Cash Flow (OCF): This reflects the cash generated or used from the core business operations and can be calculated as:
OCF=Net Income+Non-Cash Expenses+Changes in Working Capital
Investing Cash Flow (ICF): This accounts for cash used for investments in assets and proceeds from the sale of other assets, with the formula:
ICF=Cash Spent on Investments−Cash Received from Sales of Investments
Financing Cash Flow (FCF): This represents cash interactions with creditors and investors, and is calculated as:
FCF=Cash from Issuing Debt or Equity−Cash Paid as Dividends and Reacquisition of Debt/Equity
The total cash flow for the business, providing a complete picture of the company’s cash movements, is the sum of these three categories:
Total Cash Flow=OCF+ICF+FCF
Cash flow means the retaining, and expenditure of money for the growth and development of the business. If any business has a positive cash flow, it is more likely to grow than vice versa. In short, it tells the health status of a business.
In this article, you will get to understand the basics of cash flow, how to improve cash flow, the types of cash flow, the accounting software that can help with it, and many other elements.
What Is Cash Flow?
Cash flow is like the financial bloodline of a business. If it flows smoothly, the business is healthy. Just like blood flows in and out of the heart, cash that flows in and out of the business keeps the business running, or marks it’s demise.
It makes the operations run smoothly and aids in the growth of the business. The inflows come from sales and investments and as for the outflows, they come from product costs or running costs. The collective equation of this is the cash flow of the company.
Efficient management of cash flow is vital for businesses to maintain stability, make informed decisions, and ultimately thrive. It's the pulse that keeps the business engine running, and understanding its dynamics is essential for financial well-being.
14 Ways To Improve Cash Flow For Small Businesses
Since cash flow is the main element that runs the business smoothly, improving it is the most vital thing that a company should implement without delay.
Below you can find 14 different ways you can improve cash flow for your small business:
1. Improve Margins
Improving margins is a great way to improve cash flow. You can negotiate better deals with suppliers or reduce expenses by finding better rates for products to control costs.
Review your pricing strategy by incrementing prices slowly and diversifying revenue streams to improve margin so that you can have a positive cash flow.
2. Always Lease, Don't Buy
Leasing always helps in the long term as you can always upgrade to better assets without the commitment of buying something.
On the other hand, always lease your items so that you can preserve your assets. Leasing might also provide tax benefits according to your country or state.
3. Use Accounting Software
One of the best things about accounting software is that it can reduce the time you invest in tracking the cash flow. Different software help to automate bookkeeping and provide real-time insights on changes in cash flows.
You can cut down on administrative tasks by implementing accounting software.
4. Increase Sales to Existing Customers
Increasing sales to your existing customer base is a highly effective way to improve cash flow. Since they are already familiar with your products or services, the sales cycle is typically shorter, and the cost of acquisition is lower. You can introduce loyalty programs, offer bundle deals, or upsell additional products to increase the transaction value. Building stronger relationships with existing customers and understanding their needs can also lead to repeat business and referrals, which are essential for steady cash flow.
5. Offer Discounts For Early Payments
Manage discounts in a way that appeals to the customers but still provides profit to the business. If a business offers discounts on early payments, it will motivate customers to settle their invoices quickly.
Doing this can help you predict your invoices for the upcoming months and you can adjust your cash flow according to that.
6. Always Work On Improving Your Inventory
Use data analysis to forecast demand inventory so that you can avoid overstocking. A good decision would be to improve inventory turnover so that you can reduce the cost holding time.
Apart from that, negotiate terms with suppliers so that the payments are made according to the improved cash flow system.
7. Leverage Technology
Leverage technology to automate time-consuming and expensive tasks. Implementing tools for inventory management, customer relationship management (CRM), and automated invoicing can streamline operations and reduce overhead costs. Technology can also help in providing accurate real-time data, aiding in better decision-making and forecasting, which are crucial for maintaining a healthy cash flow.
8. Negotiate With Your Suppliers
Building a good relationship with your supplier can provide you with more benefits in terms of cash flow. Try asking for a longer duration to pay so that you can manage to pay with a positive cash flow.
If there is an early payment discount, it would be good to avail that.
9. Get A High Interest Savings Account
If you are looking to stabilize your cash flow, investing in a high-interest savings account can provide benefits for small businesses. The longer your cash remains there, the more you can save while maintaining liquidity.
These bank accounts can provide emergency cash in need.
10. Steadily Increase Prices
Gradual increase in prices directly adds to the positive cash flow. However, it is necessary to conduct thorough market research so that it remains in the competition.
Another option would be to provide more value with the products while increasing costs.
11. Avoid Being Short Of Cash
Always make sure that you have an emergency fund arranged. It helps in emergency situations and prevents you from getting cash from somewhere that implements high interest rates on the return.
Arrange both short-term and long-term funds for different case scenarios.
12. Manage Risk
Continuously assess and mitigate business risks, including market, credit, and operational risks, to prevent unforeseen financial setbacks.
Apart from that, develop contingency plans that outline steps to be taken in response to potential financial challenges, ensuring preparedness for various scenarios.
13. Optimize Tax Planning
Optimizing tax planning is pivotal for maintaining a healthy cash flow. Work with a tax professional to ensure that you are taking advantage of all available tax credits, deductions, and incentives. Proper tax planning can help in reducing your taxable income, thereby improving your cash position. Additionally, ensure that you are setting aside enough money to cover your tax liabilities to avoid any penalties and interest, which can negatively impact your cash flow.
14. Use Electronic Payment Methods With Low Fees
Choose electronic payment methods with minimal transaction fees to reduce the cost of financial transactions. You can use payment methods like PayPal, Stripe, Square, and Braintree so that you can save costs.
Some also allow you to track your payments real time which helps in monitoring cash flow.
Why Is Cash Flow Optimization Important For Business
Cash Flow Optimization is essential for businesses as it helps prevent spending more than the budget. There are many AI tools that help with this and businesses can utlilize them to make the method more effortless.
Efficiency and Cost Reduction
By handling and analyzing vast amounts of unstructured data at high speeds with minimal human intervention, these technologies optimize processes and reduce the resources required for manual cash flow management. Thus, increasing the efficiency of cash flow and reducing costs.
Accurate Credit Decision-Making
Since managing cash flow means more focus on where the money is going, this empowers businesses to make more accurate credit decisions, minimizing potential losses and improving the quality of their lending portfolios.
Risk Management
Unlike traditional regression models, ML models can capture non-linear relationships in the financial landscape, especially during stressful scenarios. This enhanced forecasting capability is critical for identifying potential cashflow disruptions and minimizing associated risks.
Optimized Variable Selection
ML algorithms can expedite the variable selection process for risk models, ensuring a rich feature set that covers a wide range of risk factors. Thus, businesses can mitigate them in a better way while maintaining cash flow.
Rich Data Segmentation
AI/ML's superior segmentation abilities are vital for addressing evolving portfolio compositions. These algorithms can process data at a granular level, considering various attributes for segmentation.
What Are The Three Types Of Cash Flows For Businesses
Companies can have one or three different types of cash flows related to their operating systems. The three main types of cash flows that run in businesses are:
1. Operating Cash Flow (OCF)
The cash flow that is used by the company’s main operating activities is called as the operating cash flow. It represents the cash generated by these activities.
It includes cash receipts from sales, payments to suppliers, salaries, and other day-to-day operational expenses. OCF provides insights into a company's ability to generate cash from its primary business operations.
2. Investing Cash Flow (ICF)
Investing cash flow relates to the cash used for, or generated from, investments in long-term assets. This includes cash spent on acquiring or disposing of property, plant, equipment, and investments in other companies.
Positive investing cash flow indicates capital expenditure, while negative cash flow suggests divestment or asset sales.
3. Financing Cash Flow (FCF)
Financing cash is the cash flow resulting from activities related to a company's capital structure. This includes issuing or repurchasing stocks, paying dividends, raising or repaying debt, and other financing activities.
Positive financing cash flow typically signifies external funding, while negative cash flow reflects capital repayment or equity distributions.
Best Accounting Software For AI Driven Risk Management
Accounting Software are a strategic investment when it comes to risk mitigation. These software eliminate half of the manual work and remove any risk of human error. They can track invoices, send reminders, track payments, and even generate summarized financial reports on cash flows.
One of the most used accounting AI tool is the Fortune App:
Fortune App
Fortune App is an AI financial management tool designed to help businesses maintain healthy cash flow and mitigate financial risks. It achieves this by offering a suite of features such as real-time financial insights, expense tracking, invoicing and receivables management, financial forecasting, and risk assessment.
This cross-platform mobile accounting software, available for both iOS and Android, caters to high earners and online businesses. It streamlines financial management using AI while emphasizing the importance of robust financial tracking.
Fortune's integration with thousands of bank accounts offers a comprehensive view of finances, simplifying expense categorization and enabling efficient transaction searches across connected banks.
The app ensures secure and real-time financial insights, enabling users to make informed decisions, increase savings, improve revenue, and minimize financial risks.
Pros
24/7 cashflow monitoring that auto-updates
AI personal accountant that provides recommendations based on current cash flow
Cutting-edge security for bank-level protection
Advanced transactional search for detailed cash flow view
Cons
Focus on analytics instead of budgeting
Relatively young in the market
Bottom Line
Ensuring the proper cash flow of a business is one of the most pivotal things when it comes to the success of a business. A positive cash flow forecasts better business growth. Small companies can utilize different software and maintain a set of goals that can help them significantly improve their cash flows.
As more and more companies are shifting towards automated cash flow management, it is essential to invest in one to stay ahead of the game.
FAQ
What Are The 5 Methods To Increase Cash Flow?
The five methods to increase cash flow are:
Investing in an accounting software
Synchronizing payments
Gradually increasing prices
Improving invoicing process
Manage risks beforehand
How Can Small Businesses Improve Company Cash Flow Through Suppliers?
By improving relations with their suppliers, companies can get early payment discounts, cheaper products, or late bulk payments so that they can align with the present cash flow and improve it.
What Are The Three Major Types Of Cash Flows?
The three major types of cash flows that most companies have are
Operating Cash Flow (OCF)
Investing Cash Flow (ICF)
Financing Cash Flow (FCF)
How Much Cash Flow Is Good For A Small Business?
The specific amount of desirable cash flow can vary depending on the business's industry, size, and growth stage. It is good to have a positive cash flow for the upcoming expenses.
Is Cash Flow More Important Than Profit?
Profit is essential for long-term financial health and growth, while cash flow is crucial for short-term operational stability.
Successful businesses aim to balance both effectively to ensure their overall financial well-being.
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