In accounting, cash doesn’t just mean physical notes and coins. It also refers to money available to the business, such as in its bank accounts.
When we talk about cash flow, this means how funds move in and out of a business. Managing your cash flow is important, as it helps you make sure you have the money to pay bills when you need to.
It is the fuel in the tank – too little and your business could come to a standstill – which is one of the most common reasons a business fails. So, let’s take a look at how to create and maintain a healthy cash flow.
How can I manage my cash flow?
Pay attention to your bookkeeping. This will help you spot trends and timings of money coming in, and money going out.
Look at cash flow statements – you can generate these by either using your accounting software, asking your accountant, or you could calculate it in a spreadsheet. You might also find cash flow forecasts, payables (upcoming bills) and receivables (expected payments) reports useful.
See if you need to cut overheads or spending – ‘more in than out’ is the secret of a successful business. Frequent unnecessary spending can save your cash flow.
Shorten your payment terms – for instance if your payment terms are 60 days. If you shorten them to 30 days, you’re more likely to receive payment sooner, enabling you to pay urgent bills if necessary.
Is revenue part of cash flow?
Your revenue is a part of your cash flow, but it only refers to what is coming into your business accounts. Cash flow measures what is coming in and going out.
How do I read a cash flow statement?
Cash flow statements comprise three areas:
Cash flow from operations. This refers to cash moving in and out as a result of day-to-day business. Money from customers shows here.
Cash flow from investing. This is money that you spend to increase or improve your business. For instance, buying new tools or equipment so you can work more efficiently.
Cash flow from financing. This is cash that occurs from loans or lines of credit.
How do I increase my cash flow?
It sounds obvious, but increasing your revenue is one of the fastest ways of increasing your cash flow.
A focused marketing campaign in the right places can help you grow. It sounds scary if you’ve never done it before (like everything!) but it’s worth considering if you can afford it.
Raising your prices – ask yourself ‘when was the last time I raised my prices?’ If it has been a while, and the average market cost of your product or service has increased, maybe it’s time you did too.
Pay off debts quicker – the faster you can pay off a loan or line of credit, the more money you will keep in your business. So, if you can throw extra at payments, the sooner that money will stay in your accounts.
Carefully manage your stock. If you sell products, then you need to maintain enough inventory or else you’ll run out and won’t be able to make sales. If you sell services, then you need the resources to be able to do so. The downside is that the more cash you have committed, the less you’ll have on hand to spend. It’s a delicate balance, and one which can take practice.
Chat to one of our team about accountancy support for your business. We operate a low monthly fee to help you spread the cost, and maintain a healthy cash flow! Call 020 3355 4047, use the live chat button on your screen, or get an instant tailored quote online.
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About The Author
A content writer specialising in business, finance, software, and beyond. I'm a wordsmith with a penchant for puns and making complex subjects accessible. Learn more about Elizabeth.