Improving Cash Flow

Cash flow is one of the real sinews of war in any entrepreneurial adventure. Soundly managing your liquidities is essential so that your business is sustainable and that it can grow.

What is cash flow?

Cash flow is your inflow and outflow of cash. Cash is what you can get quickly and inexpensively .

Between the time you spend to produce a good or service and the time you get paid for it, your money is tied up. He is therefore no longer available to meet other financial obligations .

Thus, even a profitable business could find itself in difficulty if it manages its cash flow poorly. This will harm its growth, its relationship with its suppliers and generate avoidable costs.

A good tool to better understand its cash flow is the operating cycle . It helps you assess your company’s effectiveness in turning production expenses back into cash .

To calculate it, you can use this formula:

[Stock run-off time] + [Average time for collection of accounts] — [Average time for settlement of your accounts with your suppliers]

If your inventory is on average 10 days in your warehouse and your customers pay you in 30 days, but you have to pay your suppliers in 30 days, your cash cycle is 10 days ([10]+[30] – [30]). It ‘s a rather slow cycle : your money is tied up for 10 days longer than it is liquid. A period during which you must pay your rent, loans, employees, etc. You must therefore find funds elsewhere to cover these expenses.

On the contrary, a fast cycle (eg [5]+[20] – [35]) allows you to meet your financial obligations since your money becomes liquid again before you have to pay your suppliers .

What makes a good cash flow?

The first thing to do is to analyze your situation and prepare a cash flow forecast.

The cash budget is an estimate of all cash inflows and outflows from your business over the next few months. You will be able to predict if you have difficulties at certain times of the year , if you have the necessary margin to accept important contracts (which can tie up a lot of money ) or even be able to absorb an unexpected expense. From then on, you can better plan your interventions and make informed decisions.

Speaking of expenses, it ‘s better to finance big purchases with a loan than to dip into your cash flow . You keep a more comfortable cushion that will allow you to deal with complications.

Next, make sure you get paid quickly. Send your invoices as soon as possible and to the right person. Have a tracking system in place and penalize bad payers. Accepts electronic payments. If a client offers you a big project, ask for staged payments.

Find out about the payment terms of your suppliers. There may be room for negotiation with some which could allow you to improve your operating cycle .

Finally, if you think you will run out of cash, take action! You can evaluate with your banker what options he can offer you : the more you are in advance, the more space you will have to negotiate the conditions . You can also find ways to generate cash quickly. Take inventory of your stocks and sell what you can. Ask your suppliers for a grace period on your payments. Keep in mind, however, that these are short-term responses that reduce your long-term profitability. If the liquidity problem is systemic, you need to design a more permanent solution.

A poorly managed cash flow can become a major source of stress for entrepreneurs. No one wants to tell a good partner or their employees that they will have to wait a few weeks to get paid. Managing your cash flow tactfully will allow you to see the blows coming and better prevent them.

Eleanore Frinqois

Eleanore Frinqois, Lead Editor at is a business leader with over 30 years in both start-up and enterprise level organisations. Previously Operations Directer at a £1.8BN media group, alongside setting-up and later selling 3 digital brands - Eleanore has expertise across all aspects of business growth.

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