4 effective ways to help improve cash flow

Not every business owner loves to crunch numbers. But business cash flow figures are worth watching closely, especially when your business is young and growing. In fact, a business with good sales and strong profits can still struggle if it doesn’t pay attention to inflows (cash added to its accounts) and outflows (cash that leaves its accounts). That’s why cash flow is so important to small businesses.

The good news is that any business owner can learn about cash flow and how to use those numbers to guide decisions about operations, investments and more. Let’s start with the basics and explore a few ways a business can increase cash flow.

What is business cash flow?

Business cash flow is generally thought of as the net balance of cash in your accounts over time. If your small business has $5,000 in cash on Monday and $4,000 in cash on Tuesday, it has a negative cash flow between those two days. But if on Wednesday your business has $6,000 in cash, your cash flow from Monday to Wednesday is positive. Businesses typically analyze their cash flow by weeks or months, depending on the rhythms of sales and expenses.

To accurately calculate cash flow, you have to think ahead to what should go right and what might go wrong. To learn how to improve cash flow, we’ll explore four strategies.

Four ways to improve cash flow

1. Calculate your cash buffer days

One useful way to improve cash flow is to periodically calculate your cash buffer days. Cash buffer days are the number of days your business can cover its expenses without inflows. A simple way to estimate cash buffer days is by dividing your average daily cash balance by your average daily cash outflows.

For example, if your business has $5,000 in cash on average, and pays out an average of $500 per day for expenses, you can estimate 10 cash buffer days ($5,000/$500 = 10). A more sophisticated approach can consider the urgency of your expenses. For example, if you typically pay an invoice within 20 days, but the vendor requires invoices to be paid within 30 days, you have 10 more days to make that payment, which can increase your cash buffer days. Your business may also have expenses — such as manufacturing supplies, temporary employees, marketing activities or subscription services — that can be paused if you’re suddenly unable to do business. Reducing these expenses can increase the number of cash buffer days.

Knowing your cash buffer days and monitoring this number regularly can help you prepare for a sudden change to your business. This practice also invites you to regularly take a closer look at your revenue and expenses, especially if you have just a few or a decreasing number of cash buffer days. By increasing cash buffer days, you’re increasing cash flow.

2. Visualize your cash flow

Sometimes it’s easier to understand how to improve your business’s cash flow by using a chart or graph. A digital cash flow analysis tool allows you to enter your cash inflows and outflows over the course of a year and analyze how your business manages cash. Map out your current performance, or run different scenarios to help you plan for what’s ahead.

3. Maximizing cash in

It’s smart business to focus on revenue, but many entrepreneurs are better at making the sale than collecting the money. An efficient receivables process that makes sure invoices go out quickly, payments come in on time and cash reaches your bank account can help your business boost cash flow.

Beyond operational efficiency, revenue urgency driven by cash flow concerns can also push you and your team to be more creative when working toward improving cash flow.

• Are your prices set at the right levels?
• Could you bundle or offer bulk discounts that increase your sales and overall revenue?
• Is there a customer segment that you can reach by making small changes to your products, services or marketing?
• Can you increase revenue by developing a new product or service?

As you think about revenue opportunities and cash flow, remember to take expenses into consideration. New revenue that requires a lot of upfront investment could strain your cash flow even more.

4. Minimizing cash out

Expenses are often what tip a cash flow position from stable to wobbly. The old saying, “It takes money to make money” is true, but spending too much too soon can lead to disaster. Here are some ways to reduce expenses that many businesses consider when cash flow gets tight:

• Reprioritize payments. If you know you’ll have cash coming in soon, you can wait to pay some bills on their due date or renegotiate the terms with vendors to help you weather a difficult time. An efficient accounts payable process can help you identify payments to prioritize and make it easier to time your payments to due dates or to match expected cash inflows.
• Reconsider investments. Investments in your company are often a smart move during good times, but if cash is tight, you may need to delay renting that new space or rethink the purchase of new equipment.
• Reduce personnel expenses. Salaries are typically a big expense, and many businesses cut hours or positions when faced with an extended cash flow problem. However, if your business is heavily dependent on customer service, you might look to make cuts elsewhere first — especially in a tight labor market.
• Rebalance inventory. Too much inventory can also endanger your cash flow — particularly if you have to pay for products or supplies upfront — but it’s a lack of inventory that can cost you sales and limit your revenue.

Ready to boost your cash flow?

Having a strong cash flow means you can prepare your business for the unexpected, while still dealing with usual costs. It can be helpful to create a cash flow statement to track the money coming in and out of your business. If you need help increasing cash flow, you can always talk with a Chase business banker.

Improving cash flow FAQs

Why is cash flow important and how can it be improved?

Cash flow is important because a strong cash flow allows businesses to meet all of their financial obligations. You can improve cash flow with the four strategies in this article: calculating your cash buffer days, visualizing your cash flow, maximizing cash in and minimizing cash out.

What are the reasons for improving cash flow?

When you improve your business’s cash flow, you can pay off debt, invest in new opportunities, expand your business and feel more confident in your financial situation.

How can I manage cash flow more efficiently?

There are many ways to manage cash flow more efficiently. Some effective strategies include regularly measuring your cash, being strategic about paying your bills, negotiating payment terms with vendors, collecting your receivables more quickly, taking advantage of credit, using technology to make and accept payments and looking for ways to move inventory. Check out “7 Tips for Managing Cash Flow” to learn more.