What is cash flow management and how to improve it

A Guide to Forecasting and Improving Cash Flow

Cash flow management is the process of managing and optimizing the cash that comes in and goes out of your business. Cash flow is not revenue, sales, nor investment dollars. And yet, it is the underlying current that drives expansion for businesses. 

When your business has healthy cash flow management, you have the funds for growth, you’re able to pay your employees’ salaries, vendor bills, and taxes on time, and you’re prepared for future financial challenges. One of the primary ways cash flow management leads to expansion is that it helps when negotiating for external funding. Lenders want to make sure that any shortcomings or expenses on a business record are both temporary and well-understood.

For most businesses, healthy cash flow can be achieved by managing accounts payable and accounts receivables in a timely manner — using automated, streamlined cash-flow management systems can help here. 

Here’s how to start creating projections and improve cash flow for your business. 

How to Create a Cash Flow Projection

Cash flow projections rely on making assumptions, and it’s important to be realistic and use only the most likely numbers. It’s standard to use a projection period of 12 months — projecting anything beyond may be unreliable. To make a realistic cash flow projection, track the following on a monthly basis:

1. Working capital: The amount of cash available at the beginning of each month that a company can readily use.

Sources of cash

2. Operating cash: All inbound payments, sales revenue, and money generated through business.
3. Borrowing cash: All loans that provide money coming into the business.
4. Total cash flow: Total working capital plus operating and borrowing cash.

Uses of cash

5. Cash expenses: An iterated breakdown of likely costs that the business will likely incur such as payroll, rent, loan payments, and accounts payable.
6. Total cash expenses: The sum of all cash expenses. 

Key factors that affect your sources and uses of cash

7. Collection Days: The number of days your company waits to get paid.
8. Payment Days: The number of days your company waits to pay your vendors.
9. Inventory Turnover: The number of days inventory sits before being sold.

After subtracting the use of cash from your working capital and sources of cash, you’ll end up with either an excess of cash (positive cash flow) or a deficit of cash (negative cash flow) for each month. 

Make sure to revisit your projections as your actual monthly cash flow statements come in. You may need to adjust your assumptions in order to ensure your projections remain accurate. 

How to Increase Cash Flow

It would seem that if a company is growing, its cash flow is as well. This is not always the case. Profits are not cash flow; even if your business is seeing increased revenue, it is likely you’re seeing increased expenses. 

Looking internally and revisiting your processes is an easy way to start improving cash flow. The processes and financial systems you have in place could be delaying, leaking, or misappropriating necessary cash. Much of the time, depreciated cash flow can be linked back to slow or unsteady billing cycles.

Whether you’re a supplier, a freelancer, or a company billing for its services, any lag in billing cycles can cause a dip in cash flow. While you may feel comfortable getting paid “in a month or so” your cash flow calculations do not favor tardiness. 

Consider the following solutions:

1. Offer incentives like payment discounts that will encourage the customer to get their payment in on time.
2. Send invoice reminders. Your clients are as busy as you are.
3. Charge for late payments. Having a solid and well-defined invoice policy or net terms ensures late payment doesn’t get in the way of your cash flow.
4. Optimize your payment systems. Consider new means by which you’ll accept payment from your clients.

Looking for more funding is another route to consider. The faster a company grows, the more financing it often needs. Explore these common forms of external financing for cash flow:

• Business credit cards: Helps you establish business credit and become eligible for long-term financing later. Downsides: High interest rates and fewer protections.
• Business (commercial) loans: Financing from a financial institution, include lines of credit: A flexible loan where you can access a defined amount of money as you need. Downsides: High interest rates and late payment fees.
• Angel investment: One-time or ongoing financing from individual angel investors, usually in exchange for ownership equity in the company. Downsides: Investors may request a high percentage of ownership. 
• Venture capital: Financing from investors, investment banks, or VC funds. Downsides: Loss of control and pressure to exit rather than pursue long-term growth. 
• Non-dilutive funding: Financing that lets you preserve ownership. Examples include small business grants and revenue-based financing. Downsides: Can be hard to qualify for and amounts may be small. 

How Settle Can Help Your Cash Flow

Settle offers modern solutions to manage your cash flow. Whether you’re looking for a simple and fast way to get your vendors paid or looking for more time to pay bills, we help keep your cash flow in a good place.

Settle’s all-in-one cash flow management platform allows you to see up-to-date outgoing cash flows as well as track your vendors, bills, and payments easily. If you’re interested in learning more, get started for free at Settle.com to discover how we can help manage cash flow and get access to founder-friendly, short-term working capital at competitive rates of 1-2% (subject to approval).