While revenue and profits indicate financial performance, cash flow drives growth. Learn 4 ways to improve cash flow in this article!

How to Improve Cash Flow

Feb 2, 2023


It is common for businesses to experience cash flow issues, but implementing the right solution at the right time can make or break a business.

While revenue and profits signal strong financial performance, cash flow drives growth. For a business to thrive, cash inflows and outflows must be timed cyclically.

Highlights of this article:

Some of the most common cash flow problems can be mitigated by businesses. Businesses must balance their operating, investing, and financing activities to keep their company afloat.

A good cash flow requires much more than being profitable.

Unlock the four ways to improve your business’s cash flow, each with its own set of tactics.

  1. Accurate Data Monitoring and Forecasting

Data is the primary source of information you use to make future projections.

If there are gaps and errors in this data set, businesses won’t estimate future cash inflows and outflows accurately.

The following data tracking solutions can help you delve deep into transactions, giving you a clear understanding of your cash position and movements.

Conduct Regular Data Analysis

Upon devising a cash flow structure, regular monitoring and data analysis are crucial for accurate future cash flow management planning and forecasting.

This process can be automated to achieve greater efficiency and provide relevant and timely feedback to users in the company.

Maintain Visibility with Cash Conversion Cycle

The cash conversion cycle is the time taken by a business to convert money spent to create inventories into cash received from sales.

Businesses should closely track their account receivables, account payables, and inventories to keep track of cash inflow and outflow.

One common cash flow problem lies in the gap between selling products on credit and paying suppliers immediately for the goods.

If debtors’ credit term is longer than suppliers’, businesses may have to match the balance by cashing out their reserve. This may lead to poor cash flow.

Companies can use accounting software to generate accounts receivable and payable aging reports that give them better visibility on their collection timeframe.

This can help them strategically negotiate transactions terms to have greater cash efficiency.

Perform Mindful spending

The more obvious yet difficult solution to cash flow issues is cutting unnecessary expenditures.

This is highly important for future cash planning and liquidity of your business.

Maintain updated bookkeeping practices or invest this cash surplus in outsourcing bookkeeping activities instead of wasting it on additional resources unessential for your business.

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  1. Accelerate Cash Flow with Digitisation

The first step for businesses to improve their cash flow is to leverage technology to have visibility on their cash movements.

This will enable them to manage their cash conversion cycle by taking relevant actions to turn inventory faster into revenue.

This increase in cash will help them consider new ventures.

Integrate Advanced Digital Technologies

Implementing advanced emerging technologies like artificial intelligence, analytics, APIs, and big data can further streamline the cash management process.

Companies with extra cash reserves can utilise the money and invest it in such advanced technologies to improve their data collection, data analysis, and cash forecasting processes.

Trends can be detected quickly, easily, and accurately with predictive analytics capabilities.

Digitalise Accounting Process

Whatever the scenario, businesses should get started by analysing their cash flow statement.

Suppose their accounting system still involves plenty of paperwork and manual processes. In that case, they should consider investing in cloud-based software that gives them broader, real-time visibility into their finances across all departments.

Modern cloud-based accounting software comes with interfaces that allow them to interact with other applications.

These include software for:

  • Banking
  • Payroll
  • Sales
  • project management

They also feature business intelligence tools, allowing companies to analyse their financial position and identify trends in detail.

This can help businesses highlight any large cash outflows and investigate their reasons.

For example, if there is a large cash outflow on increased inventory purchase, they must check whether the money spent is linked to an expected increase in sales or not. If not, this could suggest overspending.

Implement a Treasury Management System

This can eliminate the significant pain regarding multiple bank transfers and systems.

Having a treasury management system in place reduces the number of banking interfaces and centralises the entire process.

Furthermore, this system can enable companies to avoid inaccuracy in data due to manual errors with process automation. This can eventually help financial managers perform more accurate cash forecasting and management in advance.

Treasurers can utilise the saved time for strategising and planning. Unlock some cash flow management strategies that businesses can implement to streamline their cash flow cycle.

Opting for a digital working capital solution through a FinTech can further accelerate your business’s cash flow and growth.

  1. Measure Project Profitability and Firm Liquidity

Quantifiable measures give a more objective overview of your firm’s financial health.

By calculating your current cash balance and estimating future cash inflows, businesses can determine the amount of cash they need to invest in maintaining a positive cash flow.

Net Present Value & Payback Period

The correct way for a company to increase its earnings is to make investments with a Net Present Value (NPV) greater than zero.

Net Present Value tells you the current value of a stream of future payments for a project to determine its estimated profitability.

To calculate NPV, subtract the amount of initial capital required for the project from the value of net cash inflows. This would be based on the cash inflows that the project is expected to generate.

This is the Net Present Value formula. Subtract the initial investment from net cash inflows to calculate the Net Present Value.

Net Present Value Formula – Tells the present value of a stream of future cash values

Based on the NPV principles, businesses should make investment decisions depending on the profit they will yield and its cost of capital.

However, the payback period of the project is also an important factor.

If cash outflows are recovered within a reasonable period, businesses can reduce their risk of cash flow shortage.

A long payback period means it will take time for cash outflows to generate profit.

In the meantime, the business will have to resort to other alternatives to generate cash for everyday expenses.

Check on the Firm’s Liquidity Position

Liquidity ratio refers to the speed at which a firm can turn its current assets to cash to meet short-term debts.

If businesses have a healthy liquidity position, they have a higher chance of avoiding a cash shortage.

It is thus crucial for businesses to keep an eye on their liquidity level to prepare for possible adverse conditions such as a labour strike or an economic recession.

One sure way to measure liquidity is to calculate the following three ratios and assess their results.

  1. Current Ratio

It reflects whether the business has enough current assets to cover its current debts by dividing all current assets by its current liabilities.

Current ratio is current assets divided by current liabilities.

Current Ratio Formula

  1. Quick Ratio

The quick ratio, also known as “acid test ratio”, evaluates a business’s ability to cover its short-term debts with its most liquid assets.

The calculation is the same as the current ratio. The only difference is that inventory is excluded while calculating current assets as they are not as quickly cashable as other existing assets.

  1. Cash Ratio

The cash ratio gives an ultimate picture of liquid cash available in a business to cover debts.

Hence, this ratio only considers cash and cash equivalents such as bonds and marketable securities when calculating current assets.

The business then divides the current assets with the current liabilities to see whether it has enough cash to pay off its short-term debts.

Cash ratio is cash plus current assets divided by total current liabilities.

Cash Ratio Formula – Tells the true liquid cash on hand to cover debts

For all three ratios, the higher the ratio = the better their liquidity.

This means the business has increased assurance that it has enough liquid assets to cover its short-term debt liabilities.

Too high liquidity may also show that the firm does not use its current assets to generate revenue efficiently.

Therefore, a business should compare this ratio with the industry average and consider the economic cycle.

As businesses have constant streams of cash moving in and out, they must measure their liquidity at frequent intervals to be informed of their liquidity position.

Businesses must learn how to save cash to place them in a strategic position to maintain a healthy cash flow.

  1. Encourage Customers to Pay Early

Late payment is one of the most common cash flow problems slowing business growth.

The risk of late payment is always there when granting credit, but it can be minimised.

Below are three initiatives businesses can take to have a faster receivables collection process:

  1. Incentivise and Penalise Customers

For customers who pay early, offer them discounts. This strategy also works if you want them to pay a certain time before the invoice due date.

If customers have an incentive, they are more likely to pay their invoices faster.

This early money can be used to invest in other growth opportunities and help plan future projects in advance.

However, a late payment fee should be charged for those who miss the due date.

Have a strict invoice policy in place and stick to it. Maintain transparency with your clients about the fee amount, when it will be changed, and the repercussions they may have to face because of it.

This ensures customers pay on time and shows your professionalism.

  1. Streamline Invoicing Process

Postponing the creation, sending, and collection of invoices lengthens your Days Sales Outstanding (DSO). This means that the time taken to collect receivables is longer.

Automating the invoicing process can save you the time and hassle of generating invoices with a few clicks.

Customers can also pay digitally as these e-invoices have a payment button that allows them to pay through their credit card.

For more specific insights and solutions, have a further read on how to avoid late payments and boost your cash inflow.

  1. Finance your Invoices through Invoice Financing

You can now receive a portion of your invoice amount through invoice financing facilities offered by FinTech or financing institutions.

This can help you raise funds immediately and avoid any cash flow constraints along the payment process.

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