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What is cash flow, and why is it important?

Cash flow is the money that moves into and out of your business over a set time. Having a positive cash flow means you have more money coming into your business than going out, making it easier to pay expenses such as rent, bills and taxes on time.

If you have a negative cash flow, you have more money going out of your business than coming in. This means it can be harder to pay essential bills on time and can ultimately lead to much bigger problems. 

Without good cash flow, your business is unlikely to survive. But there are ways of improving cash flow, as we explain below.

Eight methods for improving cash flow

1. Get better at forecasting

As a first step, you need to be able to forecast cash flow accurately, as this will help you predict when you might find it difficult to pay bills and could help you work out whether you need to reduce overheads or find new investment, for example.

It’s best to create a weekly or monthly forecast covering the next three months or even longer. To create a cash flow forecast, you need to collate all the cash coming into the business, list all your planned expense payments, and then calculate your net cash balance. 

If your net cash balance is negative, this indicates a period during which it could be harder to pay your bills. Knowing this in advance means you can take steps to help ensure you have enough cash to pay expenses. 

If your business has been trading for a while, it’s worth studying your history to spot trends and patterns. This can help you work out when your next negative cash flow period might occur so you can plan ahead.

2. Encourage customers to pay early

Getting paid quickly helps your cash flow. To ensure this happens, invoice customers promptly and consider offering discounts to customers who pay early. 

You can also speed up the payment process by offering a number of online payment options, such as accepting credit cards, debit cards and mobile payments. The easier it is for customers to pay, the quicker they are likely to do so.  

Make sure you keep on top of late payments, too. Investing in invoicing software can be worthwhile as this will automatically chase late invoices on your behalf and keep track of payments. What’s more, you might be able to add a payment link directly to your invoice, making it even easier for customers to pay you. 

If you want to take things a step further, you could add late payment fees to your invoices. But be sure to explain these fees when you draw up the initial client contract and again when you invoice to avoid any issues.

3. Negotiate longer payment terms

Although you want your customers to pay you quickly, you may wish to delay making your own payments. Be sure to check exactly how long you have to pay a bill and aim to do so as close to the deadline as possible.

It might also be worth seeing whether you can negotiate longer payment terms with your vendors, as this can reduce the risk of a cash flow shortage. Alternatively, you could offer to pay in monthly or quarterly instalments rather than at the end of a contract. 

4. Lease equipment, rather than buying

Leasing equipment and supplies, rather than buying them, can make more financial sense if you want to improve cash flow. Buying equipment costs more upfront, while leasing enables you to pay a smaller, fixed monthly fee that won’t put such a dent in your cash reserves. 

However, you need to check the small print carefully to see whether your lease agreement includes servicing or if there are any extra fees involved. 

5. Review your inventory

Carry out an inventory check on a regular basis and make a list of any products that aren’t selling especially well. Rather than buying more of these products, you need to get rid of them, even if that means selling them at a lower price. This will help maximise your cash flow and boost your company’s cash reserves. 

6. Reduce unnecessary spending

It’s also worth going through your company finances to see whether there’s anywhere you could cut back. If you’re not using a section of your office space, or you’re paying for expensive mobile phone contracts for your employees, see whether you can negotiate a better deal and save money. 

Also, think about looking for a better deal on your business energy bills or insurance. Even if they are only small savings, these will add up and could help improve your cash flow. 

7. Think about invoice factoring

With invoice factoring, you borrow money against your unpaid invoices. This can be particularly beneficial for businesses with high-value invoices because if they go unpaid, it can have a huge impact on cash flow.

Businesses can sell their unpaid invoices to a third party, typically receiving between 75% and 95% of the invoice value upfront. This means you can access the cash early, helping you boost your cash flow.

The third party then collects payment for the invoices from the customers directly, deducting its fee before paying you the remaining balance. 

8. Experiment with your prices

Although you might be reluctant to do so, increasing your prices could help your cash flow. There’s a risk of losing some sales, but your cash flow could improve if your customers accept the price increases.