Optimising cash flow: What does it mean?

30 September 2020
optimising cash flow

In accounting, cash does not always mean the physical currency which we use in day to day life. It also refers to money that is available to a business, including what is it in its bank account.

The definition of cash flow is how funds can be moved in and around a business. Managing your cash flow within a business is vital, as it helps you to make sure that you have all of the funds available to pay urgent bills whenever you need to.

Cash flow is like fuel in a tank – if you have too little, your business could standstill, which is one of the most common reasons that a business fails nowadays. So, why not look at how to create and maintain healthy cash flow.

 

How do I manage my cash flow?

Firstly, paying attention to your bookkeeping can be vital when managing your cash flow. This will help you spot trends within your business that may relate to purchases or subscriptions, and mark timings when money may be coming into or going out of your business.

Secondly, it is extremely important to keep an eye on your statements. You can generate these by either using the accounting software that is available to you, asking your accountant to produce one for you, or it is possible to calculate your statement in a spreadsheet. You could also find that cash flow forecasts, receivables, and payables are all useful resources when managing and optimising your cash flow.

Furthermore, you should keep an eye on overheads and spending to determine what is relevant and necessary, and what can be cut. One secret to success within a business is always having more money coming into your business than leaving it. Frequent unnecessary spending can really disrupt your cash flow.

Shortening your payment terms can also be useful. For example, if your payment terms are every 90 days, you should try shortening them to every 30 days as you are more likely to receive payment sooner, therefore enabling you to pay urgent bills wherever necessary.

A merchant cash advance can also be extremely helpful if your payments come via card machine, and this is also a popular method of funding for a seasonal business. This can help to create a revolving and constant income where you will not struggle for funding in off-peak times.

Vector image of online cash flow

 

Is revenue a part of cash flow?

 

Your revenue is usually part of your cash flow, but only if it refers to what is coming into your business accounts. Cash flow measures what is coming in and out of your business.

 

How do you read a cash flow statement?

Cash flow statements compromise 3 areas. These areas are:

  • Cash flow from operations. This area refers to cash that is being moved in or out as a result of day to day business. This also includes any money received from customers.
  • Cash flow from investments. This is the area of money that you spend to increase your company’s worth or improve your business. For example, buying new equipment so that you can work more efficiently, therefore earning more money in the same space of time.
  • Cash flow from financing. This involves any cash which occurs from loans or lines of credit which would need to be paid back.

 

Cash flow image: coins and a stack of paper with graphs

 

How can you increase your cash flow?

It may sound obvious but increasing your revenue is one of the fastest and most efficient ways of optimising cash flow within a business. Here are some ways you can do this:

Raising your prices, even by a minimal rate can help you to increase your cash flow. It is important to ask yourself when the last time you raised your prices was. If it has been a while since you raised your prices, and the average market cost of your product has increased, then it may be time for you to raise your prices too.

Paying off your debts quicker can be crucial when trying to increase and maintain your cash flow. The faster you can pay off a line of credit or a loan, the more money you will be keeping in your business that can be used for other things. So, if you can pay your payments faster, you’ll have that extra money in your account sooner.

A well-focused marketing campaign that targets the correct people and places can help your business grow. It can sound scary if you have never done a marketing campaign before, but it is worth considering if you have the funds available.

Carefully managing your stock can also be an expert way of increasing your cash flow. When you sell products, it is important to maintain enough inventory otherwise you may run out and be unable to make sales and raise revenue. If you sell different services, then you need to ensure that you have the resources available to do so. The downside is that this means you will need to commit more cash towards maintaining your inventory, resulting in you having less on hand to spend. Stock management is a delicate balance, which can take a lot of practice to get right.

You can also explore some alternate financial options when trying to improve your cash flow. For example, invoice finance is a popular method of advancing cash which may be owed to you, without having to wait out the full payment terms of your invoices. Invoice financing usually comes in 2 forms, these are factoring and discounting. But it is important to keep in mind that this is not available to use on invoices that are already past their due date as these are considered bad debt and cannot be advanced.

 

how to optimise your cashflow

 

How can Maple Accountancy help your business?

If you need help managing your business’ cash flow, Maple Accountancy can help. We are a team of expert business advisors who have many years of experience under our belts when it comes to helping businesses with their finances, no matter the size or sector. We can provide a vast array of financing and accounting services to businesses which can help them maintain and improve their revenue. Contact us today on 01332 207336 or success@maple.uk.com to arrange a free no-obligation consultation with one of our expert business advisors.

Maple Accountancy is a firm of expert Business Advisors offering accountancy services, tax and business advice to owner-managed and family-owned businesses.

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