What is Cash Flow?
Cash flow is defined as the net amount of cash and cash-equivalents being transferred into and out of a business. The flow of cash is initiated by two things: money coming in (sales, commissions) and money going out (wages, cost of goods, utilities etc).
Healthy cash flow is simply when there’s more money flowing in than going out. Conversely, the opposite scenario, in which there’s more going out than coming in, is likely to put a business in a cash crunch.
Many businesses grapple with managing cash flow, and struggle to effectively manage and achieve the right balance. In fact, 82% of all small business failures stem from poor cash flow management. There are a number of different factors that can dramatically alter a business’ circumstances. These factors can sometimes persist, and eventually place owners in the unenviable situation where they’re without the necessary funds to operate effectively.
An added - and unexpected - challenge is the current COVID-19 global pandemic, which is impacting swathes of businesses around the world and reducing the supply of money flowing in. Now more than ever, businesses need to review their operations and brace for the storm during these unprecedented times.
If your business is facing such challenges, we’ve identified some areas that can impact cash flow and some simple ways to improve it.
Reduce cash flow tied up in stock
Your business' inventory is where a large majority of your cash flow will be tied up. Stock levels are a costly part of running a retail business: too much can restrict cash flow, and too little can lead to missing out on sales.
Finding the sweet spot when it comes to stock levels is the best thing you can do to improve cash flow, and ensure you’re stocking the right products and selling them for a healthy profit.
TIP: Use your Point of Sale system’s sales reports to pinpoint those high turnover items and slower moving products. Once these items have been identified, you can alter your ordering patterns and inventory levels accordingly. With an Epos Now POS system, you can create automatic minimum and maximum stock alerts, to reduce the likelihood of having excess cash tied up in stock.
With slower products and over stocks identified, it may be beneficial to run a promotion and move through the stock. This will free up any cash that is tied up in slow-moving stock, allowing you to invest more into popular or in-demand items.
Review your Insurance policies
Insurance is a necessary expense in a business. But while you certainly need insurance, it doesn’t mean you have to stay with one insurance company indefinitely.
Insurance companies operate in a competitive industry, not unlike retail. Because of this, you should get into the habit of reviewing your coverage, and searching for a better quote before your policy needs renewing. There’s nothing wrong with getting insurance companies to fight for your business.
If you find a lower priced quote elsewhere, contact your current provider and see if they will match the price or offer an additional incentive to stay. This outcome would be optimal since it can decrease your expenses and save the trouble and time it takes to switch insurance providers.
Monitor accounts and outstanding invoices
At the end of the day, it’s all about getting paid.
Make sure that if your business offers accounts or invoice services, that they are monitored and followed up when they become outstanding. Failing to collect what is due, and rightfully owed, can keep much-needed cash tied up. It’s beneficial to keep customer records up to date, and send out reminders when necessary.
TIP: To avoid payment delays in future, you could try offering incentives such as discounts for early payments. Everyone loves a discount so it comes as a win/win situation for both customer and business.
Review internal expenses
Every business is going to have certain fixed expenses that can not be avoided. Rent, internet, software and wages are some of the unavoidable ones. But there are plenty of other variable expenses that may be able to be altered that can save you money. Minimise these expenses by either reviewing whether they are more of a luxury and rein them in or hunt around for a more competitive offer on fixed expenses.
TIP: Consider using your Epos Now system to integrate with accountancy partners like QuickBooks, Xero, and Sage. An in-built accountancy module will not just automatically run your quarterly and end of year tax and VAT returns, but will also calculate your profit, loss and operating margin daily, weekly, monthly, yearly, or over a custom time frame.
Keep cash reserves
While it may not always be achievable, having a reserve fund set aside for emergencies and unexpected expenses can be a huge benefit for businesses.
This backup can be used to manage those unexpected challenges that arise and avoid having to rely on credit cards or finance loans.
Whether or not your business is in a healthy position when it comes to managing cash flow, the truth is that it can always improve - particularly if you’re making use of software to automate tasks. If you want to find out more about using cloud technology to improve your cash flow, speak to one of our consultants today.