Expense management

How to increase cash flow in a business?

Apr 05, 2024

Any good business that wants to last a long time will need to have good cash flow, especially considering that so many aspects of your business will be impacted by it. A robust cash management solution can be a valuable tool in this process.

With good cash flow management, you’ll be able to ensure that the daily operations of your business go smoothly, your debt repayments are not a problem, and you’re ready for new investment opportunities. Here are some ways to improve cash flow to achieve better growth.

What is cash flow?

To know how to improve cash flow for your business, it’s important to know what cash flow actually is. In short, cash flow is the money that goes in and out of your business. It’s the movement of money within your business.

What are the components of cash flow

Operating cash flow

To put it simply, operating cash flow consists of all day-to-day operations inflows and outflows. This includes operational costs like purchasing inventory from your suppliers, settling salary payments, paying your rent, and other expenses you make to ensure that your business can run smoothly.

Money made from your sales is considered part of your operating cash inflow. Ideally, you want your business to have positive operating cash flow, as this means that you will be able to sustainably continue daily operations without having to worry about operating expenses.

Businesses with a negative operating cash flow, for example, may find it hard to pay employee wages.

Investing cash flow

While it is possible to rely on your operating cash flow to ensure that all daily activities go smoothly, it’s difficult to grow and scale your business quickly with just that. This is where investments come in. If your business has purchased securities to hold as investments in the form of stocks or bonds, the inflows and outflows of your investments will be considered part of your investing cash flow.

On your cash flow statement, inflows such as interest and dividends paid to your business from these holdings will be reflected under the investing cash flow category.

Similarly, money that you use to make investments will be considered investing cash outflow.

Financing cash flow

Your financing cash flow is made up of cash inflow and outflow between the company, its owners, and any creditors. You’ll find transactions such as dividends, debt, and equity listed under your financing cash flow. When you sell shares in exchange for capital, for example, the transaction is considered part of your financing cash flow.

Dividend payments to shareholders and owners can also be found under your financing cash flow statement.

 Considering that dividend is essentially money going from the business to the owner, any dividend payment would be listed as cash outflow. On the flip side, cash from selling your shares is considered inflow.

What are the common cash flow challenges?

Delayed customer payments or collecting receivables slowly

Your business relies on customer sales to be able to pay monthly expenses. When customers aren’t paying on time or receivables are coming in slowly, it creates more pressure and may cause you to even have problems paying your suppliers on time. Getting stuck in this cycle for months can cause businesses to fail.

High operating costs and expenses

Having good cash flow relies on your business not having more expenses than you do income. If your operating costs are high, you might find it difficult for your income to be high enough to match the costs. In this case, you will need to cut back costs or find ways to increase income fast.

Low profit margins

While it’s good to sell your goods or services at an inexpensive price to attract more customers, having profit margins that are too low can also impact your cash flow negatively. Should your business run into emergency situations, for example, you may not have enough cash reserve with low profit margins.

Seasonal fluctuations in revenue

Some businesses do better in certain seasons compared to the rest of the year. While these seasons may net you high income and profits, lower seasons will be much more difficult. This is especially true if you have similar operating costs from month to month regardless of sales.

Limited access to financing options

A lot of business owners can sufficiently fund their businesses with their own money, but this is not true for everyone. It takes a lot of money to make money. If your business doesn’t have access to different financing options to make this happen, your cash flow could suffer.

How to improve cash flow in a business


Cut unnecessary expenses

There are many cash flow improvement ideas, but an obvious one that can be implemented to improve cash flow immediately is to cut back on unnecessary expenses.

You want to review and analyze your past cash flow statements to identify which expenses can be cut. If you find it difficult to cut expenses entirely, you should also consider looking into whether or not cheaper options are available to you.


Effective invoicing

While ultimately whether a customer pays their invoices on time or not is in their hands, you can nudge your customers to pay faster by ensuring that you have an effective invoicing process. By sending your invoices to customers quickly, you can shorten the payment cycle.

You also want to take a look at your own invoice due dates and negotiate effective invoice terms with your customers according to your needs.


Cash flow forecasting

You could improve cash flow management significantly by doing some planning.

Look at your past cash flow statements and determine what your income and expense patterns are like. Based on this information, you should be able to create a forecast for the next few months or quarters.

A cash flow forecast document can help you estimate how much cash you will have for expenses as well as how much income you must make.


Standardize billing

Without a standardized billing process, you could end up wasting time figuring out how to bill customers. That’s detrimental if you want a faster payment cycle to be able to pay your suppliers.

Standardizing your billing process will not only improve company cash flow, but will also ensure that all your employees are on the same page.

With how costly mistakes can be, ultimately you could be saving money by making sure there’s a standardized process to follow.


Streamline accounts payable process

Having effective invoice terms to manage cash inflow from paying customers is great, but another answer to how to improve cash flow is by having your accounts payable process work in your favor.

You don’t want to unnecessarily waste time with tedious manual processes, which could lead to supplier payments being delayed. Streamlining your accounts payable process will ensure no late fees are incurred and gives you better visibility into your AP.


Implement an effective AR process

Your AR process is more than just sending bills to customers. Encompassing billing, collection, and records, implementing an effective end-to-end accounts receivable process will help you improve cash flow.

While standardizing your billing makes sending out invoices faster, an effective AR process that introduces different payment methods to make paying easier for your customers will ultimately be what shortens the payment cycle. Introducing automation tools can help make the whole process go smoothly.


Inventory management

Having excess inventory is an issue that many businesses have, which unfortunately can lead to poor cash flow. Ideally, you want to spend money to make money, which you cannot do if your inventory is not turning into sales.

To improve cash flow, you want to ensure that you’re buying just the right amount from your suppliers and not overstocking. If you have existing stock, it’s best to get them moving before buying more.


Cash flow monitoring

It’s no surprise that when your cash flow isn’t monitored properly, things can get out of hand quickly. One of the most important steps you must take to improve cash flow is to make sure that you’re monitoring your income and expenses.

The last thing you want is for your expenses to go untracked, only to later realize that it’s more than you have budgeted for. Make sure that you’re aware of how much cash you have.


Negotiate payment terms with suppliers

With most suppliers, you won’t be required to pay immediately after you’ve been billed. You and your suppliers will likely have had prior discussions about your payment terms, which could give you a few days or weeks, or even months to settle invoices.

If you’re finding that your payables cycle is not matching up with your receivables, however, negotiating different payment terms with your suppliers may tide you over.


Consider leasing instead of buying

It’s natural to gravitate toward buying, especially when it’s often the cheaper option compared to leasing if you plan on using a piece of equipment for a long time.

However, in certain situations when you don’t have enough cash on hand to buy equipment, leasing is a viable option. You’re likely to have cheaper monthly payments, which will help tide you over. You’re better off buying only when you’re sure you have the money.


Consider invoice factoring

If you’re presently strapped for cash because you’re still waiting on customer payments, you may want to consider invoice factoring.

Instead of having to wait for your customers to pay off their invoices, factoring companies can help you improve company cash flow by settling your customers’ outstanding invoices either partially or in full. It’s a way to quickly get cash on hand if you’re willing to pay a percentage of the invoice as the factor’s fee.


Seek financing options

Short-term debt like invoice factoring is definitely a viable solution for immediate problems such as upcoming supplier payments, but other financing options could also help you improve cash flow.

If you’re in the early growth stage of your business, for example, you may need to burn a bit of money before you reach profitability. Long-term loans, new investors, or other financing options could be what you need for a steady positive cash flow right now.


Automation technologies

While there are many cash flow improvement ideas you could implement, many of them can be time-consuming and complicated. To effectively improve cash flow, consider using automation technologies and platforms to cut back on the time and energy required to do otherwise manual work.

Making use of expense management software, for example, can make it easy to track where your cash is going. Other tools like AP automation systems will also simplify your processes.


Stop selling to customers with poor payment history

You’ll have run into at least a few customers that are not great at ensuring that their payments are made on time. In this case, you want to assess the pros and cons of keeping them as customers, especially if late payments have been causing you trouble.

While it may be a hard call to make, sometimes the best course of action is to stop selling to delinquent customers and focus on new prospects instead.

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Significance of positive cash flow on business growth

Financial stability

It’s difficult to manage a business when you have to worry about whether or not you have cash every day. Having a positive cash flow ensures that all your operating expenses are covered, giving you financial stability for day-to-day business operations and making it easier to grow your business.

Investment opportunities

Another big reason why you want to improve cash flow is to open up your business to more investment opportunities. Maintaining a positive cash flow means that you have some cash to spend. When you have more than enough to hold on hand, you’ll be able to invest in your business growth.

Debt repayment

As your business grows over time, you’ll be expected to be paying off your long-term debts. On top of that, you’ll also likely have short-term debts for day-to-day operations. Having a positive cash flow means that you won’t have to worry about short-term debt.

Flexibility and adaptability

No matter how much you plan ahead, there may still be unprecedented situations or sudden changes to the market that require you to adapt your business. You never know when you’ll need to spend more money than necessary or lose out on income. In these cases, it’s best to have a positive cash flow for emergencies.

Investor confidence

Investors aren’t interested in businesses with negative cash flow that are struggling to cover costs. To inspire confidence in your current and future investors, you want to improve cash flow to show them stability. A positive cash flow is a good indication that the company will stay in business, making it an attractive prospect.

How can virtual cards help with cash flow management?

There are many ways that you can improve your business cash flow. Most of them, however, require the right tools to support you. Use virtual cards for business expenses to help you with cash flow management and grow your business faster.

Streamlines payment processing

It may not be immediately obvious, but streamlining your payment processes can help significantly with cash flow management. You’ll be saving time and money by having proper policies and tools in place.

Virtual cards allow you to forego manual processes, making payments easier for everyone involved compared to other payment methods.

Improves visibility into spends

It’s important that you keep a close eye on your cash outflow. Using virtual cards will help you in centralizing all your transaction records, with cards linked to a card management platform that will automatically update when an expense has been made. You won’t need to worry about untracked transactions or spending more than you should.

Improves security and reduces frauds

Cash flow management is also about making sure that your cash is used appropriately. With virtual cards, ensure that no unauthorized transactions happen. You want to be sure that you’re setting spending limits and your employees make expenses appropriately. The added layer of security that comes with virtual cards will help you achieve this.

Unlock the potential of virtual cards for your business. Dive into our in-depth article on various virtual card use cases to know more on how virtual cards can help businesses.

How can we help - Volopay!

Use Volopay virtual card to streamline and simplify your cash flow management. You can make day-to-day business operations much easier with features like automatic transaction records, in-built spend controls, and accounting integrations.

You won’t have to worry about employees overspending and having that impact your cash flow negatively. 

With your expenses taken care of, you can improve cash flow more efficiently. Volopay will ensure that your business funds are secure and used appropriately, making it the best tool to manage your business cash flow.

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