How To Increase Your Cash Flow Today

It’s the question many business owners often find themselves asking. I have clients. I provide quality services. I sell good products that consumers want. But I never seem to have any money.

Where does it all go?

A successful business cycle looks something like this: create revenues=> translate those revenues into earnings=> convert those earnings into cash flow. Rinse and repeat. Seems simple, but obviously isn’t. Where does it all go wrong?

To find out, you must have a clear understanding of how the Statement of Cash Flows works. This report is every-bit as important as the Income Statement and Balance Sheet. What makes it challenging for non-accounting types is that it starts with Net Income and works backwards through the balance sheet. I’ve given many reasons on why you should outsource your bookkeeping; this is yet another one.

I’ll attempt to explain this report in its simplest terms as well as offer some tips on how to improve your cash flow.

We’ve all heard the term “Cash is King”. In a world of cliches, this is not one of them. If you don’t have cash, you don’t have a business, or won’t for very long. However, a business’s cash flow can come in one of three forms. The first and most important, is from operations. Operations are the core activities of your business, like selling products and paying bills. Without sounding like Captain Obvious, you want more inflows (sources) from revenues than outflows (uses) from expenses. Long-term business viability always comes for core operations. If you only remember one thing from this post, make it this. Maximize your efforts in these activities and outsource the rest. I’ve said this in previous posts, but it bears repeating.

The most common source of cash from operations is receiving cash from sales. For restaurants, revenue is converted to cash immediately through cash or credit card payments. However, many businesses don’t operate like this. A doctor’s office for example, issues an invoice for services rendered, Same with an accountant and many other businesses providing services. Remember in a previous post where I stated the service business make up approximately 88% of the U.S economy.

When you issue an invoice, that is non-cash transaction because the asset (accounts receivable) goes up along with revenue. It only becomes a source of cash when your customer pays the invoice. The accounts receivable decreases and your cash asset increases, thus resulting in an inverse relationship. The opposite it true for uses of cash. For example, we received an invoice for supplies we use in producing our product. This is also a non-cash transaction because we incurred an expense but posted to an accounts payable account. It becomes a use of cash when we pay it. The payable goes down along with our cash, resulting in a similar relationship. To calculate the net cash from operation, you analyze the net activity of every working capital account to determine if you have a net source or use of cash. I can probably stop here and tell you to work with a skilled bookkeeper or outsourced CFO advisor as most of you non-accounting types reading this are probably lost at this point. But I will mention the other two as they are a little easier to understand.

Cash flow from investing is cash used for assets today that will provide a financial benefit in the future. Some examples are investing in a property, plant, and equipment. Another example is if you buy another business, or even enter into a joint venture with another partner. You are essentially laying money out today in order to receive a (larger) payment tomorrow. Note that these investments may or may not have anything to do with your current core business.

Cash Flow from financing is when you borrow money from a lending institution. Of course there is an interest cost, but this type of cash source is much easier to obtain. In addition, you keep complete control of your business.

You may be asking yourself at this point what are some ways to improve your cash flow. Cash flow problems usually begin with a poor invoicing system. Or maybe you have a lot of bad clients. That will be for another post. A typical invoice is sent out with terms of net pay of 15 or 30 days. Consider adding a “Pay Now “option for a 1% discount. Make sure you provide as many options to pay as possible: check, credit card, Venmo, PayPal, Zelle, ACH. You may incur some processing fees, but you’ll get paid faster. Finally, if you have a lot of deadbeat customers, consider selling your receivables to a factoring company. You’ll have to sell at 5%-10% discount, but you’ll be done with it. Finally, don’t threaten collections unless it’s a last resort. There could be a very good reason that your customer can’t pay at that time. In addition, they could be a very good customer. Don’t ruin a good relationship over money, unless you’ve explored all other options.

More cash up front means you have money to pay your bills. Just like you, your vendors want to get paid too. You can take advantage of generous payment terms, and, if you can, pay as quickly as possible if there is a discount offered. Just like you don’t want to deal with collections, neither do your vendors. They want to keep you as a customer.

Here are a few other things you can consider doing. For projects that cover a considerable amount of time, use a percentage-of-completion method when billing your client. Another popular option, and one I use, is to get one-half of the fee up front, and the rest when the project is completed. If you’re in a business that has a lot of inventory, review what is selling and what is not, and don’t be shy about pulling the plug quickly on poor selling products. Use Pareto’s rule, which I wrote about in a previous post. If you use QuickBooksOnline, you can use tags and categories to easily track your inventory and product sales. If you are in a business that uses a lot of heavy equipment, consider leasing instead of buying. Finally, establish a line-of-credit with your local banking institution. This can be an excellent source of short-term cash, should the need arise.

Managing cash flows is such an important aspect of running your business, but a difficult one to understand for most business owners without an accounting or finance background. Always review the aging Accounts Receivable and Accounts Payable reports in addition to reviewing your Balance Sheet and Income Statement. In any case, it would be to your benefit to work with a bookkeeper/CFO specialist that understands the Statement of Cash flows. Your chances of moving your business forward increase significantly.  

As always you can contact me for a free consultation.

Dream Big. Think Big. Go Big.