Cash flows determine the cash situation of your business, meaning what’s coming in and what’s going out. Prosperous businesses strive to increase the amount of money coming in and minimize the money going out by cutting expenses and taking other financial measures.
A fine business cash flow position is also extremely beneficial in future business financing. Lenders review your cash inflows, credit scores, and credit rating to determine your affordability for the business loans.
Credit scores are assigned by credit bureaus: Experian, Equifax, and Transunion.
- Experian credit score ranges from 300-850
- Equifax credit score ranges from 280-850
Lenders assume that you are responsible for handling your financial obligations if you have more cash inflows and a higher credit rating.
Cash Flow Calculation
Following four important factors help us in calculating the cash flows of a business:
- Cash flow of investment activities
- Cash Flow of financial activities
- Net cash flow
- Operating cash flow
Best accounting tools are available which can help your business calculate cash flow statements accurately. Generally, we calculate the cash flows as:
Net Cash Flow = Operating Cash Flow -/+ Cash Flow of Investment Activities -/+ Cash Flow of Financial Activities
Financial Activities Cash Flow, Operation Activities Cash Flow, Investment Activities Cash Flow
- Financial Activities Cash Flow: This cash flow keeps an eye on the following business financing activities:
- Cash borrowed from lenders
- Shareholder Dividends
- The cash lent by investors
- Debt Repayment
- Lease payments on finance
Lenders are interested in your payback affordability and shareholders want their dividends, this cash flow gives them quite a transparent picture regarding both dividends and credibility.
2. Operation Activities Cash Flow: Some examples of operational activities are:
- Income tax payments
- Purchase of Inventory
- Wages to employees
- Payment to suppliers
- Rent Payments
- Cash obtained from sales/ customers
OFC also called, cash flow from operational activities, indicates how much cash does your business’s operations consume and how much you earn out of it.
3. Investment Activities Cash Flow: Following factors affect this cash flow:
- Borrowing money
- Purchasing fixed assets (equipment, property, etc.)
- Selling stocks/ bonds
- Selling fixed assets
- Insurance payments of fixed assets (in case of destruction)
This cash flow calculates how much money is coming/ going in long-term investments. Primarily, it’s relevant to purchase/ selling/ maintenance of fixed assets.
What is Meant by a Good Company Cash Flow?
A good company cash flow is directly proportional to the financial health of your business. It highlights that whether or not a company has enough to cover:
A hearty cash flow means:
- Good Cash Flow of Investment Activities: We calculate how much a business has spent on purchasing and maintaining assets. Business is usually spending more on assets than gaining from them while starting up, so if this cash flow is decreasing initially – it’s not a bad thing!
- Good Net Cash Flow: Cash flows of investment, financial, and operational activities together formulate a net cash flow. If more money is earned, it’s a positive sign and the cash thus earned must be invested for future business growth.
- Good Cash Flow of Finance Activities: This cash flow decreases while paying loan installments and shareholders’ profits. It increases while accepting a loan or investment. Borrowing wisely helps you in business expansion and growth.
- Good Cash Flow of Operation Activities: This cash flow assesses the viability of your company’s operations. Good operational management will bring in more money from operational activities than spending. In the opposite case, management must take measures to procedures efficient and effective.
How can Companies Boost their Cash Flows?
Now we know that solid cash flows are as much crucial for a business’s breathing as trained employees, engaging marketing strategies, and upgraded products/ services offered.
But how do we do that? Well, there are myriad ways we can ensure cash flow success:
Negotiation with Suppliers
You can benefit from the long formed relationships with suppliers/ vendors by asking them for discounts or other negotiations:
|You can ask for contract termination and hire a better vendor if you have been facing challenges like:Late deliveriesIncomplete/ faulty deliveriesBad customer support, etc.As more and more businesses are going digital, a new supplier may offer better facilities.
|If you plan on ordering more from vendors (for example in case of market expansion, or introducing a new product), you can inquire about discounts in exchange for bulk orders and suppliers are usually more than happy to lend you.
|If your cash flows are in the decrease phase, you may ask for an extension in payments for maintaining cash outflow and inflow.
Keeping the existing customers is as much significant as gaining/ attracting new ones. While later requires marketing expenditures and a proper strategy, the former is quite possible through upselling:
- Tailored Recommendations: The purchase history of customers must be considered while upselling. If the customer has bought a single filet burger at a restaurant, he/ she can be up-sold a relevant add-on like salad or extra fillet.
- Free Shipping: This incentive lends more returns comparatively. The customers spend a few more bucks to avail free shipping. E.g. some eCommerce platforms have a spending cap like Spend $55 to avail free shipping.
- Upselling emails: Emails can remind your brand to customers through cell phone notifications. For example, a loungewear store can let its customers know about a new drop of Christmas pajamas collection through email.
Market expansion is a great way to boost cash flows and utilize them for affording expenses, investments, and debt repayments.
You may expand via:
New Marketing Strategy
If you see a little room for improvement in current products and services, consider expanding your audiences through newer and effective ad strategies. E.g. numerous brands are expanding their potential customer base via TikTok (video networking social application).
- As per a new WARC study, 80% of TikTok users believe that the application helps them discover helpful brands and products.
New Products/ Services
A new and relevant launch of products and services is a great way to bring in more cash inflows. E.g. makeup brands are always adding to their product menu from palettes to skincare, to makeup tools, etc.
Invest the Cash You Own
If your cash flows are too positive, it is also an alarm and an encouragement for you to invest this money to earn more money. You can invest in stocks, expand your business venture by starting a mini business and buying equipment, and you may also employ it to clear debts and improve credit ratings and credit scores.
If your product/ service value is incomparable and loved by a larger set of audience, chances are that you can further decrease this price sensitivity by heavy advertisement and communication of the value you provide.
- Companies like Apple and Michael Kors, deal in luxury items, and customers are willing to pay 13-18% for high-living non-essentials.
Even if you can afford business expenditures well with current prices, underpriced products (in comparison to competitors) can affect your business image somehow.
Moreover, businesses suffered supply shortages due to pandemic hit in 2020 rose overall prices, so consider keeping them competitive for hale and hearty cash flows.
Small Business Loans
Small business loans are feasible for improving short-term cash flows. Businesses may also qualify for revolving credit and interest is charged only on the amount used. If you’re struggling to pay your suppliers, purchase order financing companies can help provide the capital needed without sending you into debt.
Moreover, since these loans are released in a short time and have repaying facilities over a set period, these can clear immediate needs quicker.
Loans can be employed in:
Consider Technological Advancements
Manual work and local hiring can be costly sometimes, and technology has provided efficient substitutes. It results in positive cash flows. Moreover, security risks and recovering from virus breaks can be extremely expensive.
Investment in security software can prevent such expenses, and:
- Less wastage
- Better manufacturing techniques
- Efficient stock management
Better Invoice Management
Businesses may suffer from cash shortages due to poor invoice management. The faster and diligent you are with sharing invoices with your clients, the quicker you get paid.
Myriad accounting tools are available in the market to produce and keep track of these invoices and remind of any overdue payments.
You may also encourage customers to pay earlier and get incentives like discounts or charge a fee on late payment.
Consider Business Outsourcing
Full-time hiring is not a must for businesses today. You can easily outsource technological experts for software up-gradation, 24 hrs. remote customer support, accountant for tax season, etc.
- 78% of companies are happy with their outsourcing partners.
Platforms like Upwork and Freelancer.com have further eased access to professionals short-term, paid significantly less, and improved cash flows.
Cash Flow Forecasting
Forecasting in cash flows aids you to plan and be prepared beforehand for both investments and expenses. Software applications like spreadsheets come in handy while preparing these forecasts, you just need to input:
In case you find out ample cash in reserves, you can plan for:
- Stock purchase
- Technological investment
- Debt repayments, etc.
This also prevents you from surprises like extremely low cash in reserves, etc.
Increase your Payment Modes
In addition to the old payment methods like credit cards, bank accounts, and cash, etc., consider adding modern electronic payments facilities too e.g. PayPal, mobile payments, etc. This facility will add convenience to the existing customers, and transactions are also quicker.
- There exist 392 million PayPal users worldwide.
Plus, it’s safe and time-saving. Furthermore, your bill payment regime is also eased and you can enjoy premium facilities too.
Asset Finance for Funds
For a short-term cash flow boost, your company’s valuable asset (e.g. equipment), can be refinanced and held as collateral in return for loan money by asset finance providers. The amount very much is influenced by the current value of the asset.
Recheck Operating Expenses
Increasing income and controlling expenses go hand in hand while maintaining healthy cash flows. To recheck upon operational expenses, the following tips can help:
|In case both cash and loan are not options for you, leasing equipment can swell monthly cash flows to some extent.Note that this equipment won’t be your fixed asset.
|Unplanned expenditures can cost high and disturb your cash flows. Plan and cut out avoidable expenses to save cash.
|Your operational manager can help you find any operational loopholes (if any), to speed up company procedures, save time, and save employee wages.
Eliminate Chances of Fraud
Where technological advancement has eased access and procedures, it has also catered hackers to make frauds. Businesses need to seriously consider IT and bank account security to eliminate chances of break-ins.
- Changing passwords
- Employing dedicated laptops for transactions
- Updating software
These are some of the many practices advised by shrinking deceits.
What are the Types of Cash Flows?
There are three types of cash flows:
- Cash flow from operating activities
- Cash flow from investing activities
- Cash flow from financing activities
What is the Purpose of Cash Flows?
Its cash insights help businesses in decision-making. Companies plan investments and debt repayment schedules via cash flows.
Why Do Companies Consider Cash Flow Statements?
This statement reflects the good/ bad health of cash reserves in the company. Shareholders, investors, and lenders judge the liquidity and profitability of an organization via cash flow statements.
How can One Keep the Cash Flowing?
Some of the ways a company can keep the cash flowing are:
- Controlling expenses
- Investing in technology
- Investing in security
- Market expansion
- Upgrading products/ services
- Supplier negotiation
How to Protect Cash Flows?
Managing cash flows, encouraging clients to clear bills in time, and supplier negotiation are some practical ways to protect the cash flows of a business.
How to Forecast Cash Flows?
Cash flow forecasting has the following steps:
- Forecast sales
- Estimate inflows (e.g. investments, loan money)
- Estimate expenses (e.g. debt repayments, dividends)
- Compile all the noted estimations
- Compare estimations from actual results