How to maintain good cash flow and why it is important

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When running a business, maintaining a stable cash flow is key to the company’s survival and success.

But how do you go about this? In this guide by the Funding Invoice team, we explain how you can maintain cash flow and why it is so important for your business.

What is cash flow?

Simply put, cash flow refers to the money coming in and out of your company account, and you have two types, cash inflow and cash outflow. These are the main differences between the two:

Cash inflow: this is the money you receive from customer payments, loans, savings and investments. It can also include investors as well as invoice finance payments.

Cash outflow: these are expenses, i.e. anything that your company needs to pay out for, apart from credit. This may include any of the following: payroll for employees, supplies, materials, overheads, taxes, any property leases.

However, good cash inflow isn’t the only thing that matters, but rather more importantly, it is the management of cash flow that is key to running a successful business. This is because if you are unable to handle finances responsibly, you could find yourself in a situation where you have initially had good cash flow, before things turns sour and you end up with negative cash flow, which could have significant consequences for your company in the future. We will take a look now at some of the best ways you can manage your cash flow efficiently.

The importance of good cash flow and maintaining it

Cash flow management is important for your company for a multitude of reasons. These include:

  • Strong cash flow helps your business to be able to invest in the development of its products and training, helping your company to develop and expand
  • Greater flexibility is another benefit of good cash flow, as you are better able to deal critical decisions that may appear out of the blue
  • If you find yourself in a situation where a loan defaults, you have greater protection
  • Offers your business greater stability, particularly important for startups and SMEs
  • It also ensure that good relationships are maintained with lenders and clients

Monitoring  your inventory

When running a company, it is vital that you regularly monitor your inventory levels to ensure that it is performing well, because otherwise it can be a simple and careless way to lose money.

If you find a product is not performing well, it is still possible to maintain cash flow if you find it is better financially to substitute this line for a better performing product, or buy it back completely.

You also have the option of  discounting inventory goods that are not selling, however much you try, as the quicker it is sold off, the faster  you can replace it with a product that is more profitable. However, it is generally recommended to leave this to when you have run out of all other viable options.

Invoice financing

Did you know that on average, almost half of all invoices are not paid on time? For a business, and particularly startups and SMEs, this can pose a serious problem. This is because the impact of late invoices can hinder your cash flow, as it can effect on your ability to be able to pay for inventories, pay your staff or pay businesses on time. For this very reason, invoice financing tends to be a popular option for companies which receive orders in advance and have payment terms of several weeks or month.

Funding Invoice commonly works with caterers, fashion designers and those moving consumer products, as it means they can receive funding and maintain stability for their business.

Giving incentives for prompt invoice payments

Another way of tackling cash flow requirements is by offering incentives to customers for payments. For example, offer a discount if they receive their goods before they have paid, as long as they pay within the first seven days of receiving the  invoice.

Upfront deposits

You can also manage your cash flow in your business through upfront deposits which is common for food caterers for banquets, events and weddings. Alternatively, if it is a project that is ongoing, you could similarly organise regular payment intervals to keep your finances in check.

Always prepare for emergencies

Where possible, prepare for an unexpected emergency that could leave your business in financial difficulty, which may very well have the impact of affecting your cash flow for a considerable amount of time.

It would be wise to regularly pay into a savings account, budgeting a certain amount each month to put in, as this can help give you peace of mind should something go wrong, as you will know you will have something to fall back on should the worse happen.