When it comes to business, cash rules everything. Or, in the immortal words of the Wu-Tang Clan: Cash (flow) Rules Everything Around Me.
Early 90’s hip-hop aside, cash flow remains the most important metric any business owner can track. While that may seem obvious, how cash flow is calculated is often not so cut and dry.
For starters, cash flow is not equal to revenue.
For example, if your business earns $10,000 in revenue a month but three-quarters of the money is in invoices that haven’t been paid, you don’t have $10,000 to leverage to purchase, for example, more supplies.
Cash flow looks at more than just revenue, it looks at the full picture of how assets are flowing in and out of your business.
What is Business Cash Flow and Why Does It Matter
In plain terms, cash flow is the net amount of cash transferred in an out of your company from one period to the next. For example, if your business takes in more cash than you payout, you have a positive cash flow. However, if you pay out more than you take in, you will have a negative cash flow.
When it comes to business, your cash flow (and how it changes over time) is a key indicator of financial health. A marked increase in cash flow is a solid indicator that business (and your business strategies) are successful.
Cash flow can be important when applying for business loans, negotiating payment terms with vendors, or if you are debating if now is the time to invest in growth opportunities.
Positive cash flow also gives your business greater flexibility when responding to market trends or making critical decisions. For example, it is far easier to justify investing in a new technology that could increase profits when your business has a positive cash flow.
Here is how to get a grip on your cash flow— and how to improve it.
How to Manage Your Business’ Cash Flow Effectively
Cash flow is the lifeblood of your business. A successful business needs to make money, but maintaining cash flow is about more than just producing a product or designing a service, marketing it, and waiting for the cash to flow in. While those steps are important, cash flow is not equal to profits. There are several other steps you can take to manage your cash flow effectively.
Get Started By Getting Organized
Driving and maintaining positive cash flow requires getting organized and making a plan. Before you make any moves, take the time to sit down and review your financials. Start by looking at expenses—how much goes towards payroll, debt, taxes, rent, and one time-fees like a business incorporation fees or licenses.
Next, take a look at how much cash flow you expect to bring in every month. If you offer a subscription-based service or product, be sure to consider factors like churn. If your business is new or if you’ve recently shifted focus, aim to be conservative. Sure, it might be nice if you increase your customer base by 50% every month, but is it likely? While you can’t truly predict the future, keep your expectations mid-range.
These details will provide you with the insight you need for the next step—improving your cash flow.
How to Improve Your Cash Flow: A Checklist
Now that you have a good grip on the overall health of your business, let’s look at improving your business’ cash flow. The most straightforward path to better cash flow is to increase marketing spend on advertising and thus, revenue. However, every business is different. What works for one company may not work for another.
Luckily, there are multiple ways to improve cash flow without increasing your ad budget. Review all the following steps and apply those that make sense for your company.
- Sell Unnecessary Assets: Printers, old equipment, computers, and anything else taking up space that you are not using or intend to use in the next 6-8 months.
- Reduce Expenses: For example, can you move to a smaller office? Look for ways to cut back on office supplies and other costs.
- Follow up with Customers Quickly: Research shows that leads are 100x more likely to respond when they are contacted within 5 minutes of reaching out.
- Reach out to Suppliers: Consider renegotiating terms with your suppliers by offering to pay faster or ordering larger shipments (if the product will get used, of course.)
- Examine Staffing: Can you shift to a more flexible staffing schedule? This may allow you to cover peak times and decrease payroll.
- Adjust Bonus Payment Schedules: If you are paying out staff bonuses or sales commissions before payments come in, adjust your schedule to pay after you receive payments from customers.
- Make Early Payments For Discounts: Some vendors will offer a discount for early payments, which can save your business money. If they do not, make payments when they are due, so you have time to build up the cash.
- Stay On Top of Invoicing: Instead of waiting to send out invoices, send them as soon as the work is done or the product is delivered. Stay organized and respond to queries quickly so you can reduce payment times.
- Consider Using Mobile Payments Options: It is easier to get paid fast when making payments is easy. If you work directly with customers, for example in their home, consider using a mobile payment system so employees can take payment when a service or product is delivered, rather than waiting for a check in the mail
- Streamline and Automate Accounts Payable: Your accounts payable department controls a large portion of your business’s cash flow. Automating and streamlining invoice processing and other functions of the AP process is one of the easiest ways to increase your cash flow.
How Automating Accounts Payable Increases Command Over Cash Flow
For most businesses, the AP department is responsible for managing the money flowing in and out of a business. (Some companies split incoming and outgoing into accounts receivable and payable, but many small to medium-sized businesses manage this in one department).
Automating the AP process can have a large impact on cash flow by saving time, reducing errors, and, in some cases, reducing the amount you pay on invoices.
Spend Less Time & Money on Invoice Processing
Processing invoices can be long and expensive when done manually. In many cases, it can take up to 45 days and between $12 and $30 to process one invoice manually. Using an AP automation tool streamlines the process by keeping communication, documents, and queries in one location. AP automation tools can even send automatic reminders to approvers to speed up the approval process. This can save businesses up to 90% on invoice processing costs.
Reduce AP Errors
When AP is a manual process, human error can end up costing businesses thousands of dollars. When invoices are paid twice or paid late, it eats up valuable employee time and costs your business money. AP automation can check for duplicate invoices and even send notifications before a bill is due, saving your company time and money.
Catch Fraud Early
Invoicing fraud cost companies nearly $7 billion dollars in 2018, according to a recent report from the Association of Certified Fraud Examiners. Fraud can occur for a variety of reasons, including lack of communication, hacking, and a company’s failure to ensure invoices are verified before paying.
Automated AP software can help catch invoice fraud by ensuring invoices are verified, flagging duplicate invoices, and providing an audit trail where both invoice communications and field inputs are centralized on top of the invoice itself.
Take Advantage of Early-Pay Discounts
One of the easiest ways to increase your cash flow is by reducing the amount your business pays, right? AP automation makes it far easier to stay on top of deadlines by sending reminders and centralizing invoice communications.
This provides you with the opportunity to take advantage of early-pay discounts by speeding up the invoice process and preventing invoices from falling through the cracks. In addition to helping you avoid late fees, it can also allow your business to take advantage of early-pay discounts on invoices.
Final Thoughts on Prioritizing AP Health in 2020
When it comes to running a successful business, cash flow is one of the most important indicators of the health of your business. However, many businesses overlook the impact the AP department can have on overall cash flow. As 2020 kicks off, make sure you are not wasting valuable resources and cash on bloated, outdated AP processes. Consider AP automation as a solution for your cash flow struggles.