If you aren’t already familiar with the term, you can probably make an accurate guess as to what cash flow is. The folks over at Shopify define cash flow as:

the amount of money, cash and non-cash, traveling into and out of a business. A positive cash flow is more money coming in than going out, and a negative cash flow is less money coming in than the business needs to cover outgoings.”

Sounds straightforward enough, so why is there such a big deal being made about cash flow? According to the Government of Canada, only 63% of businesses survive their first 5 years of existence, a number that drops to 43% after 10 years.  For businesses that are just starting out, having enough cash on hand is the only way to survive.  So assuming that you want your business to last, managing your cash flow, and increasing it, is the only way to keep from going under. 

It’s important to distinguish cash flow from profitability. This may be where some businesses get tripped up. You may have great sales numbers but if most of those sales are still in Receivables, you won’t be able to pay your staff, taxes, lease(s), suppliers, credit cards, loans and other expenses. So while focusing on sales and profits is important, just as important is focusing on your cash flow.

Financeit puts it this way:

“protecting the health of your small business cash flow is more than a simple matter of ensuring that you price profitability into each job while maintaining a competitive rate. You also need to work to ensure that those profits are getting off your books and into your bank account as quickly as possible.” 

Money is already tight for a lot of businesses, especially those re-investing in their growth. Having enough liquidity is not only vital for covering expenses, it’s crucial for risk management. Times may get tight, sales may start to dwindle, suppliers may increase their prices, all the above can happen at the same time. Adding a lack of cash to that equation could very well result in a business going under.

Consider Leasing Instead of Buying and Other Expense-Reducing Measures

While leasing may end up costing more in the end for office space, for vehicles and business equipment that depreciate, the same may not necessarily be true. What is true is that leasing results in lower instalment payments and those payments are tax deductible. Obviously, reducing your expense amount increases cash flow amount so take advantage of all cost-saving measures including supplier discounts for bulk purchases and early payments – as long as those purchases will move quickly and the early payments don’t result in negative cash flow.

Think of Cash Flow Management as a Daily Task

Making sure that Receivables are converting into cash is something that has to be addressed every day, especially if you’re a startup. While you don’t want to be making daily calls to clients with outstanding accounts (unless they’re overdue) thinking about ways to improve your access to sales revenue should occupy your thoughts and actions every day. This can include:

  • Sending out invoices immediately and make sure they’re accurate
  • Revisiting your payment terms regularly to make sure they work for you and consider implementing a down payment policy
  • Educating your staff to ensure their all familiar with payment terms 
  • Forecasting revenue and expenses for the next week, month, six weeks, quarter, year to help you plan out cash flow needs and strategies

Incentivize your Clients to Pay Early

There’s a reason why some suppliers offer discounts for early payments – those discounts may cut slightly into profits but as discussed, sometimes cash on hand is more valuable than a higher amount of cash in theory. This is where predicting your cash flow expectations can help you decide when cash flow is more important than potential profits.

On the flipside of early-payment discounts is late-payment penalties. Penalties also incentivize customers to pay on time. You may also want to consider a credit limit, especially for newer clients. If you’re still having issues collecting on overdue accounts, maybe a factoring partner is the answer. Factoring is essentially outsourcing your accounts receivable department to a company that will pay you a percentage of your receivables up front and take over collecting on those accounts. This option is probably best for businesses with a lot of receivables and a cash flow conversion problem.

Use a High-Interest Saving Account, Inventory Management and Price Point

Knowing your customers well can, among other insights, let you know if they can afford to pay more for your products and services and how willing they are to do so. It’s also important to get familiar with your inventory to know what’s selling, what’s not and if you need to get rid of stale inventory at a discount. Finally, using a high-interest savings account that requires a low minimum deposit and pays you more for your business is an easy way to increase your cash flow.