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Cash flow: the ultimate guide

Capitalise Aug 03, 2023

Managing your finances effectively is crucial for the long-term success of your business. A critical aspect of financial management is understanding and optimising your cash flow. Cash flow is the lifeblood of any business, and maintaining a healthy cash flow ensures your business can cover expenses, expand and survive in times of economic uncertainty.
In this guide, we will explore the concept of cash flow, its importance, and provide practical tips for managing it effectively.

What is cash flow? 

Cash flow refers to the movement of money in and out of your business over a specific period. It involves tracking your income (from revenue, sales, etc.) and expenses (such as bills, salaries, stock). 

There are three main types of cash flow: positive, negative, and neutral. Positive cash flow means your business is generating more money than it spends. Negative cash flow means that your business is spending more than it generates. Neutral cash flow means your income and expenses are balanced.


Importance of cash flow management

Proper cash flow management is essential for several reasons:

  • Day-to-Day Operations

A positive cash flow ensures you can cover daily expenses like rent, utilities, and salaries without disruptions.

  • Investment and Growth

With surplus cash, you can invest in new equipment, marketing, hire new staff, or expand your product/service offerings.

  • Emergency Preparedness

Having a cushion of cash helps you navigate unexpected downturns or emergencies.


Cash flow formula

A cash flow formula is used to calculate a business’ net cash flow. The formula is simple: 

Cash inflow - cash outflow = net cash flow.

To accurately calculate your business cash flow, you’ll need to understand the components of the formula:

  1. Cash inflows include all the sources of cash coming into the business during the period, such as cash sales, collections from customers, interest income, and other receipts.
  2. Cash outflows include all the sources of cash going out of the business during the period, such as payments to suppliers, employee salaries, rent, utilities, loan repayments, taxes, and other expenses.

Tips for managing cash flow

Accurate cash flow forecasting

You should develop realistic cash flow forecasts to anticipate any cash flow fluctuations. Make sure that you account for seasonal variations, market trends, and other external factors that could impact your revenue. 


Use a cash flow forecast template to easily predict your cash flow. 


Offer incentives for faster payments

If you invoice your customers, you can encourage them to pay promptly by offering discounts or other incentives for early payments. You could also discourage late payments by implementing late penalties. 
To understand better what to include in your customer invoices to encourage on time payments, use an invoice template


Implement an effective credit control process 

Credit control is essential to improve a business's cash flow as it ensures customer payments are made on time and minimises bad debts. By running company credit checks, you can ensure you are only extending credit or long payment terms to reliable and creditworthy customers. An effective credit control process also involves proactive follow-ups on outstanding invoices, along with efficient debt collection strategies, to help speed up cash flow. 


Negotiate with Suppliers

Having favourable terms with your suppliers, such as 30, 60, or 90 day terms, will improve your cash flow as you have longer to pay for the goods your business needs. You could also negotiate terms with your suppliers that align with your cash inflow schedules. 
Having a good business credit score will give you greater negotiating power. 


Monitor and reduce expenses

Regularly review your expenses and identify areas where you can cut costs, without compromising the quality of your products or services.


Keep sufficient cash reserves

Where possible, try to maintain an emergency fund to cover unexpected expenses or revenue shortfalls. This buffer will help you avoid resorting to expensive business loans during tough times that could impact your cash flow. 


Manage your stock and inventory wisely 

Try to strike a balance between keeping enough inventory to meet your demand and avoid excess stock that ties up your cash. 


Cash flow is essential for the survival of your business, without it you may be unable to meet liabilities or expenses that keep your business running. If you think you may have a cash flow shortfall, then a business loan could help to bridge that gap and ensure your business continues to run and thrive.  

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