Positive Cash Flow Checklist

Cash is king. Business owners understand that better than most, but what does it actually mean?

And what can you do to boost the cash you have in your business?

It’s not just about earning more, but having strategies and techniques that enable positive cash flow.

Read on for a seven step checklist to managing cash flow in a healthy business.

TL; DR

To review your cash flow, follow these steps:

Review cash flow statements
Create a cash flow forecast
Correct cash flow issues
Review your pricing
Create sales projections
Review your collections methods
Plan any capital needs

Importance of positive cash flow for businesses

Cash flow refers to actual money coming in and out of your business. In a positive cash flow environment, you’re earning enough money to cover all your outgoings – not just expenses and overheads, but investments, capital purchases and anything else you spend money on.

Earning isn’t just your revenue either: it could be cash flow from investments, cash flow from financing (e.g. A loan drawdown bringing cash into your business), or owner investment.

In a negative cash flow situation, you’re spending more than you’re bringing in. There’s only so long a business can survive in these situations.

Businesses go through ups and downs all the time, and the key is to be able to intervene in the down periods to improve cash flow and keep the business running.

Cash flow problems are cited as the number 1 issue by more than 80% of businesses that fail. This one statistic alone illustrates the importance of managing positive cash flow.

How does a company’s cash flow change over time?

Startups face a much different battle to improve cash flow than more mature businesses.

Startups tend to lose money in the first few years, which means getting artificial cash injections to achieve positive cash flow and stay afloat.

It’s common for new businesses to seek fundraising or other forms of finance to get them through to the point where they’re earning enough money to cover their outgoings organically.

One of the challenges for startups looking to improve cash flow is they can struggle to satisfy credit requirements for traditional forms of lending. They may not have an established credit history or enough assets to provide as collateral for a loan.

It’s much easier to get support for better business cash flow as an established business. Older businesses are more likely to have significant assets that can serve as collateral on borrowing, and they’re more able to get a bank’s approval for a loan.

The challenge with this situation is often, older businesses are more able to meet their cash flow needs from their earnings, but they’re more able to get borrowing. Meanwhile, startups that often need a loan to survive the first few years can find it hard to get one.

There’s a saying, “to get a bank loan, you first have to prove you don’t need it”, and this can often seem to be the case.

7-step end-of-year cash flow checklist

Managing cash flow is something business owners need to be doing year-round. However, the end of a reporting period presents an opportunity to review your approach, make improvements and do cash flow modelling to set yourself up for a successful upcoming year.

Review your cash flow statements

Cash flow statements document periods of incoming and outgoing cash. They’re one of the best tools for analysing your performance to understand exactly how healthy your cash flow has been in a given period. All accounting software will have some form of cash flow statement report that you can easily view.

Looking through your monthly cash flow statements can provide insight into cash flow timing and trends in your business, which helps to inform your forecasts and allows you to take action to address any potential issues.

For example, you may identify serial late paying customers. Overdue invoices place huge cash flow pressure on businesses, so you might consider charging late fees to encourage customers to pay invoices on time. You can also identify cash flow gaps where the timing of cash coming in does not cover the expenses due to go out.

Create a cash flow forecast schedule

Forecasting cash flow is critical to making informed decisions when it comes to business activities. Cash flow projections should be created for at least each quarter, but can be for up to a year. These are no longer hard to do with many low cost Finsbury reporting tools that link to your accounting software. Many business owners can now do this themselves, but it is often valuable to get advice from your accountant or a business adviser.

Forecasts help business owners to understand seasonal trends and predict the highs and lows. In particular, being able to identify a slow period in advance helps to take action so the business has cash on hand to be able to get through these times.

For example, you might hold off purchasing new equipment until after a quiet period.

Correct any cash flow problems before the year’s up

Reviewing your cash flow is an opportunity to chase up any unpaid invoices before the end of the reporting period. This means your financial reports are as relevant as possible, with transactions being recorded in the period in which they took place.

You may also be able to achieve better cash flow by reducing business expenses, our negotiating extended payment terms with suppliers. Improving cash flow will look different for different businesses, but this is a chance to look holistically at your cash flow and find ways to improve it.

Review your pricing strategy

Even a small rise in price can improve business cash flow significantly. Assess things like inflation, market fluctuations and what impact different levels of price increases would have on your business.

If you do decide to increase prices, consider how you’ll communicate this to your customers, and the process you’ll go through to actually do it.

The way you manage customer relationships through a price rise will have a significant impact on how they feel about it.

Create sales projections

Sales targets help to motivate staff to hit their goals, particularly if you incentivise them. Incentives do not only need to be money. Research has shown there are many more and often more effective ways to motivate people.

Having challenging but achievable projections maximises business performance and enables better planning when it comes to ordering stock, budgeting, hiring staff, investing in growth and obtaining any financing you might need.

Keep working to improve collections

All businesses that invoice customers will have to deal with chasing overdue invoices at some point. By looking at your invoicing and collections processes, you may be able to identify areas that can be improved in order to encourage customers to pay invoices on time.

Not only does this save you having to chase up late-paying customers, but it can have a big impact on cash flow.

Plan your capital needs

Getting a business loan from a bank can take a lot of time. Rather than waiting for when you need it, if you can identify periods of negative cash flow in advance, you can apply for a loan beforehand.

You can also set up invoice financing, launch a round of fundraising or consider raising capital.

The pressure of being cash flow negative can make arranging finance stressful, but having a safety net set up in advance is a big help.

Improving cash flow through invoice financing

Invoice financing from FundTap is an immediate way to improve business cash flow. FundTap has been developed to overcome the biggest issues of traditional invoice financing, providing flexibility and simplicity to time-poor business owners.

FundTap customers have been able to achieve positive cash flow through invoice financing, with the average user increasing business revenue by 54% in the last two years.

Users can set up a free account and be approved for borrowing within 24 hours. There are no admin, system or subscription charges, which means invoice financing is available whenever your business needs it. If you don’t – great. There’s no charge and no obligation to use it.

FundTap has built in flexibility that other providers don’t have, which makes it the perfect financing safety net when you have cash flow challenges. It also allows you to keep the costs of borrowing down, because it’s a short term loan that is quickly repaid.

Find out more about how FundTap works, or check out a free demo account today.

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