In this blog, we will discuss:
If you are a business owner, you are already aware of how crucial cash flow is to your business. Cash flow is the lifeblood of a business. Why? Without proper cash flow, it would be difficult to continue daily operations such as payroll for employees, pay vendors, or even invest in equipment. Though most people would say look at the net income for that, without cash businesses die. Even if net income doesn’t meet your standards at the moment, looking at cash flow may actually indicate that the business is in a healthy state. So, pay close attention to the Cash Flow Statement as it can save your business from disasters.
Why It’s Important to Increase Cash Flow
Increasing cash flow can improve creditworthiness, profitability, and overall financial health to the business. When owning a business, there will be a cash flow problem at least one point. The real question is: are you checking the Daily Cash Flow Report? When business owners avoid checking reports, there could be serious consequences that they will come across, such as bankruptcy. Here’s a list of the top common cash flow problems and how it can be easily avoided or solved.
How Does Cash Flow Decrease?
There’s many things that contribute to low cash flow. Here are the top two factors that decrease cash flow from operating activities. Try and avoid the following two risky situations:
Net Income, also known as net earnings or net profit, is the total return after taking out taxes and other deductions from the gross income. A decrease in net income will oftentimes result in a decrease in cash flow. With that said, an increase in cash flow also increases net income. So it’s best to keep an eye on the cash flow statement to see what area might be having the biggest impact.
Working Capital is the difference between the current assets and current liabilities. Changes in working capital will decrease cash flow if there are major changes in the following:
Lower Inventory Turnover
Low inventory turnover implies that the business has weak sales and a decline in demand for the products or services. This could also mean that there’s less effective inventory management which in turn affects the balance sheet as well. The loss in cash here decreases cash flows from other necessary operating activities.
Growth in Days Sales Outstanding (DSO)
Days Sales Outstanding is an important measure for determining how much cash to have available. If a business’s days sales outstanding is increasing, that’s a warning sign that something needs reviewing. There’s many factors that could go into increasing a business’s DSO such as: a decline in customer satisfaction, sales department people are extending payment terms, etc.
Decline in Days Payable Outstanding (DFO)
Days Payable Outstanding is another important measure. It is the average number of days it takes for the business to pay off bills and invoices. This could be to other company vendors, suppliers, cost of sales, number of days bills remain unpaid, etc. The more days that these bills go unpaid, the more build up there is liabilities on the reports, as well as, lowering cash flows from operations once again.
How to Increase Cash Flow
Product Pricing Structure
Consider raising the pricing sheet if it has been awhile. “If your pricing is too affordable, you won’t be taken seriously” (Entrepreneur). Also as a business owner, it can be easy to feel overwhelmed and be taken advantage of. Recognize the worth of the products and services that your business is providing as this will boost cash flow.
Reevaluate the money that is going out from the business. Cutting out unnecessary expenses can save lots of cash. With the extra leftover cash saved from the needless costs, cash flow effectively raises. Here are two important questions to ask yourself:
Can the business survive without these expenses?
If they are necessary, is there another alternative that is cheaper?
If you are unsure of how to read the cash flow statement, here’s a quick video on the fundamentals and more.
Some clients are very organized and either pay on time, or maybe even early. For these clients, maybe provide some sort of incentive for keeping it up. However, some clients can have difficulty keeping up with the payments and therefore late becomes a habit. In cases like this, offer the incentive for early payments, or if necessary move on to giving a late penalty. This will greatly improve the overall cash flow for the business.
Building good habits isn’t easy. Therefore, get in the habit of evaluating financial reports, if you don’t already. When looking at the reports, make sure not to skip out on the cash flow statement since it’s one of the most important elements in any business. It is imperative for a business owner to spend time analyzing how the business’s cash flow is doing as it will help avoid future disasters. If you are already reviewing these financial statements, then keep going and take the business further and increase the cash flow. Increasing the product’s or service’s financial value will develop the company’s cash flow. Along with cutting out extra costs and establishing a proper invoicing processing system.