What does it mean to improve cash flow?
If you browse any business or trade site you’re bombarded with ads and marketing slogans heralding “improved cash flow,” “improve your cash flow,” etc. Aside from the obvious almost meaningless literal definition, what does improving cashflow mean?
The worst part is that you could look for hours and not ever find something to help if you needed to genuinely find ways to improve cash flow. Most resources are bullet-pointed lists that mostly state the obvious, like “avoid late fees” or “stay on top of your books.” However, if these are the tips you needed, then you’re not likely to succeed even if cash flow improves. For a business that’s already doing the obvious and necessary accounting functions looking to improve cash flow, there’s very little information out there.
To understand how to improve cash flow we need to first understand what cash flow actually means. In simple terms, cash flow is the difference in the amount of cash between the beginning and end of an accounting period. Positive cash flow is when you end the period with a higher balance than when you started, and negative cash flow is when you end the period lower than you started.
Improving Cashflow: A how-to guide
There are literally a handful of ways to improve cash flow, but most of them could have big effects on business operations or are easier said than done. These include increasing prices, selling more goods or services, getting a loan, bringing in equity, selling assets, or paying bills slower. This is why most tips focus on the last couple of ways: reducing costs or collecting faster.
While these solutions may have their own barriers, and they can even overlap with some of the other solutions above, these last couple are typically easier areas to make changes to improve cash flow. Whether it’s something simple such as reducing costs by moving from paper or manual processes to digital, or improving software to integrate with partners; or whether it’s something with a bigger impact like leveraging or financing receivables, or, more robustly, something like the Crowdz InvoiceXchange which allows for all of the above in one platform.
The effects of improving cash flow are readily visible, especially in a world where low cash reserves is the number one cause of failure for startups and running out of money is the number one cause of business failures in the US. Having cash is obviously beneficial, having more, quicker, is even better for both short- and long-term business viability and success.
To improve cash flow, businesses must do the obvious (monitor the books and business) to understand which method is best for them, but moving into the digital age and using automated services is a good first step. While leveraging receivables is usually less painful and sometimes significantly more beneficial than the alternatives of waiting or fighting for payment.