8 ways to increase cash flow
Healthy cash flow helps businesses to avoid financial risks and make the most of their growth potential. Here are eight of the best ways to improve cash flow.
Cash flow measures the net balance of money flowing into and out of a business. In flows are generally made up of revenue from the sale of goods and income from investments, while outflows take the form of expenses and debt payments. Optimizing cash flow by taking a sophisticated approach to cash flow management is crucial to efficient business operation.
By improving cash flow, businesses can increase their access to cash that can be used to pay expenses and service debts. Better cash flow management also enables businesses to invest in future growth or increase their resilience to adverse market conditions.
Healthy cash flow is especially important in times of economic uncertainty, such as those brought about by high inflation or recession. It allows for the maintenance of a cash buffer, used to protect against unexpected financial challenges.
The following strategies and best practices can help you optimize your cash flow management, thereby increasing cash flow:
1. Optimize your accounts receivable process
Businesses tend to have large sums of money tied up in their accounts receivable – payments owed to them by customers with outstanding invoices. Accordingly, changes to accounts receivable processes that accelerate how quickly that money is received can help to improve cash flow. Accounts receivable strategies to speed up cash flow include:
- Ensuring AR processes are as streamlined as possible by integrating automation to send invoices promptly and using an e-invoicing solution.
- Reviewing relationships with buyers and rewarding companies that pay on time or early through early payment programs.
- Deploying solutions such as AR financing to speed up collections without harming supplier relationships, leveraging third-party financers.
- Maintaining clear communication channels with buyers to ensure that payment terms are mutually understood and resolve disputes as quickly as possible.
2. Rethink your inventory management strategy
A significant amount of cash can also be tied up in inventory, so inventory management is a key consideration for increasing cash flow. The greatest cash flow benefits are realized through strategies that ensure that inventory needs are met while minimizing carrying costs and maximizing the efficiency of working capital deployment.
Companies can lock in cost savings by working with suppliers offering more competitive pricing or early payment discounts. They can also adopt inventory management techniques, such as:
- Economic order quantity (EOQ): This involves looking at all costs related to purchasing and delivering goods and materials while factoring in demand for the product. Although it minimizes costs by attempting to ensure correct inventory levels, EOQ-based inventory management doesn’t account for fluctuations and assumes the immediate availability of new stock.
- Just-in-time (JIT): Designed to minimize waste by receiving goods only when production begins, JIT requires suppliers to be extremely reliable and production to be steady and problem-free.
It’s important to note here that when stock levels are kept to a minimum, the business is more vulnerable to supply crises and unexpected increases in demand. Other approaches to inventory management, such as bulk buying or maintaining high safety stock levels, mitigate these risks. However, they come with the cost of harming cash flow rather than accelerating it.
3. Hold on to accounts payable for longer
Although companies should avoid late payment fees – and reputational damage – by paying suppliers on time, there are several ways that accounts payable (AP) management can result in improved cash flow. Fundamentally, it can be leveraged to allow businesses to hold onto their working capital for longer.
In particular, solutions like dynamic discounting and supply chain finance can allow companies to secure risk-free discounts or preserve their working capital:
- Dynamic discounting is a self-funded solution, with suppliers receiving early payment in return for offering a discount on their invoices. The earlier the invoice is paid, the greater the discount the buyer receives.
- Supply chain finance also enables suppliers to receive early payment on their invoices. Set up by the buyer, supply chain finance is typically offered to suppliers at a cost based on the buyer’s credit rating, resulting in a more favorable cost of funding.
In addition to improving cash flow, the automation of AP processes – typically implemented through a dedicated software solution – can improve the consistency of accounts payable processes by automating each step of the accounts payable process, accelerating cash flow.
4. Maximize capital usage
To generate returns from otherwise idle cash, capital should be deployed efficiently. Options may include investing in infrastructure projects, ranging from land acquisition to the purchase of fixed assets such as machinery and equipment or in investment vehicles and interest-yielding savings.
Companies can choose suitable projects or products by assessing past rates of return on comparable assets. Whatever the chosen investment, it is important to balance getting a return on your capital with building resilience to protect against operational risks that may present themselves in the future.
5. Streamline operations for efficiency
Costs can also be reduced by seeking efficiencies in day-to-day operations. This, in turn, can result in improved cash flow.
For example, companies can harness automation – particularly in their supply chain operations – to maximize efficiency and minimize the need for monotonous tasks. Delegating tasks to automated software solutions can minimize the risk of human error, increase supply chain visibility, and improve customer satisfaction.
6. Prioritize strong supplier relationships
Strong supplier relationships are the foundation of a healthy supply chain, and prioritizing these relationships can positively affect the company’s resilience and growth. In the short term, it can lead to improvements in cash flow through better payment terms and the greater availability of discounts. In the longer term, stronger relationships can minimize delays, disputes, and quality issues.
Key to this approach is identifying the suppliers that are most important to the business. Using a centralized tool such as a supplier information management (SIM) system, a business can manage its suppliers and develop more productive relationships in a streamlined way.
7. Monitor cash flow KPIs
Monitoring cash flow KPIs can help companies better understand their cash flow performance and pinpoint any areas needing attention. As such, KPIs should be monitored using a consistent approach that provides regular updates on performance.
Deciding which KPIs to track comes down to the business’s specific objectives. These can include funding growth, limiting debt, increasing resilience – or just creating a buffer against unexpected expenditure.
8. Improve cash flow forecasting
A cash flow forecast shows your projected cash position based on income and expenses for a given period. Improving the accuracy of your cash flow forecasting can make it easier to predict future opportunities or threats. Although better forecasting may not directly increase cash flow, it is a crucial tool for capitalizing on future events and protecting against future risks.
Cash forecasting software can show companies how to increase cash flow by combining live and historical data while using time series machine learning techniques to predict future flows. The resulting predictive models can facilitate both deeper analysis and dynamic decision-making.
A combined approach to boost cash flow
Each of the above tips is a potentially powerful tool in accelerating cash flow and giving your business more money to spend on fueling growth or building resilience. However, the best effects occur when a holistic approach is taken to improving cash flow.
You can reap large rewards by focusing on several areas that each improve cash flow. As a result, your business will be in a better financial position, able to ride out the waves of challenging economic conditions and build towards a better future.