Maintaining good cash flow is key to running a successful business. With a consistent level of cash, you can keep your operations running smoothly, covering your overheads, without the risk of cash blockages causing disruption.
This will also reduce the risk of your business needing external funding by enabling you to stay on top of your financial commitments.
However, if you aren’t careful, it’s easy for your cash flow to take a hit. Too often, when this happens, business owners bury their heads in the sand rather than take prompt action to rectify the issue before it spirals out of control.
We’ve previously spoken about the importance of spotting the symptoms that you might need financial help. However, it’s also critical to understand the signs of healthy cash flow in your business, so you can make sure you are ticking the right boxes.
Below, we have listed those key signs – and what to do if you need a cash flow boost.
The signs of healthy cash flow
You can consistently cover your expenses
The first sign of good cash flow is meeting your expenditure commitments regularly.
If you find yourself missing payment deadlines, having to request extensions, or being unable to pay altogether – especially if it happens more than once – it’s typically a sign that you may be facing cash flow problems.
Your customers pay you on time
A common cause of restricted cash flow is late payments coming from customers. While one missed or late payment should not cause too much chaos in a business with healthy financials, it can have a sizeable effect if this is a recurring problem.
Frequent late payments can impact your affordability, leaving you unable to cover the costs you need to while you await your income. If this spirals, it can lead to negative cashflow and the resulting debts. You may even need to resort to legal action, which is time and effort most companies do not wish to waste.
You have surplus cashflow every month
We have already mentioned the need to balance your outgoing expenditure against your revenue. However, if your income barely covers your outgoings, you aren’t giving yourself much room for manoeuvre if there’s an unexpected rise in costs or revenue decreases.
You need to be generating a positive cashflow.
The benefit of having this margin is that if you need to cover an unexpected expenditure or sales revenue is below targets, it won’t entirely derail your finances. It also enables you to steadily build up cash reserves that you can use for future investment or cover financial shortfalls.
You have an excellent operational cash flow ratio
One way to determine your financial health is to calculate your operational cash flow ratio. This is sometimes explained as the number of times a company could pay off its debts with money generated in the same timeframe.
This is worked out by taking your cash flow from your operations (as found in a cash flow statement) and dividing it by your liabilities (e.g. the expenses you need to cover regularly).
Your calculated figure should be greater than one. If it isn’t, it means your expenditure outweigh your income – and you need to act.
You have diverse sources of revenue
When thinking about cash flow, it’s a good idea to have your revenue coming from various sources. This could include sales from different products and services or income from different customers or contracts.
The reason that this matters is that it prevents you from relying on one income stream. If something were to happen – for example, a customer no longer requires your services or one of your products declines in popularity – you still have other sources of revenue. This would prevent cash flow from being reduced on such a sizeable scale, allowing you to maintain your operations.
An unexpected expense won’t floor you
Unexpected costs arise all the time in business. A piece of equipment may break and need replacing, you may need to hire an external service to deal with an issue, or a supplier might have to increase their prices.
While inevitable, it’s almost impossible to plan these expenses – which means your finances need to be stable enough to cover them when this happens.
If the thought of an unplanned cost scares you, or you believe your business may not be able to survive such an obstacle, it’s an indicator that your cash flow is too tight, and you need to work on achieving a better financial balance that allows you to cover unexpected costs.
Your cash flow is increasing over time
In the course of your business, prices will increase in line with inflation and other factors. Your goals will also likely change, bringing new priorities which affect how you spend money. As such, you need to ensure your cash flow positively increases over time.
Improving cash flow is a sign that your sales, profit and revenue are also rising, highlighting success. If it remains stagnant, it may mean you need to focus on attracting more customers to your business – and that you’re likely to run into issues as your costs start to increase.
You have money to invest back into the business
A healthy cash flow means you should have sufficient reserves to be able to reinvest elsewhere.
If you have growth ambitions, as most businesses do, this is also essential in fuelling your expansion, such as helping to fund new assets, expanding your product/service portfolio or hiring new talent. Even if you don’t wish to grow, you will need to optimise your business eventually – including updating dated equipment.
If you find yourself with limited funds to invest back into the company, you need to improve cash flow.
How to improve cash flow
If any of the signs above do not apply to your business, then it is likely that you will be considering what you should do to improve cash flow. Taking swift action as soon as you’re aware there’s a problem is generally the best way to handle cash flow, enabling you to find a solution before it’s too late.
Below, we’ve listed some of our top tips for managing and improving cash flow.
- Introduce robust credit management practices. If your financial issues stem from missed or late customer payments, it may be time to get tougher to ensure you are getting paid on time. Setting up an effective credit management process, such as agreeing on payment deadlines, carrying out credit checks and sending reminders, should help you communicate your expectations to customers and deter them from falling behind on payments.
- Manage your costs. When cash flow is limited, one of the first steps you should take is to minimise your costs. By undertaking an audit of your expenses, you can eliminate any unnecessary fees (without disrupting productivity) and lower costs where possible. This will ease some of the pressure off your cash flow.
- Identify cost-efficient processes. Similar to managing your costs, you should seek to run your business in a cost-efficient way. This means finding the right strategies, including those requiring minimal expense, reducing waste, and consuming less energy.
- Utilise external support. Thankfully, many external solutions in the business finance market can enable you to improve cash flow and survive temporary barriers. These options include trade finance, sale and leaseback, invoice finance and stock finance. By researching the opportunities in the market, you should find the right solution for an injection of funding into your business that suits your needs.
Conclusion
Cash flow is a constant juggling act that every business must do. However, with effective cost management, a robust credit policy and an understanding of the healthy signs, you should be able to keep an appropriate financial balance that enables you to operate smoothly.
If you start to experience the symptoms of poor cash flow, it’s essential to act promptly. This will allow you to nip any issue in the bud and stop it from worsening – culminating in even more restricted cash flow, disruption and even debt.
We offer a variety of solutions that can enable you to improve and maintain cash flow. Our team can take you through the products available and find the best route forward.
Get in touch today to find out what options are available for your business.