How to Improve Your Business’s Cash Flow
Written By
Andrew Miller
VP, Relationship Manager, Middle Market Banking
Cash flow keeps a business running and determines how much it can grow. While many owners keep an eye on the numbers, fewer use cash flow calculations as a decision-making tool.
Knowing how to calculate operating cash flow is an important first step, but the real value lies in acting on those insights. Catching problems or opportunities early allows you to make proactive adjustments to strengthen your position. The right financial tools can also help protect your runway and support long-term growth.
How to Calculate Cash Flow (Quick Refresher)
While there are several cash flow calculations, in its simplest form, cash flow is the movement of money into and out of your business. It shows whether you have more cash coming in than you have going out to cover expenses. Understanding how to calculate net cash flow starts with a simple formula:
Cash Flow = Cash Inflows – Cash Outflows
For example, if a company receives $50,000 in customer payments and spends $45,000 on expenses during the same period, its cash flow is $5,000. A business with positive cash flow has money left over to reinvest, disburse or save. Negative cash flow typically suggests the company is spending more than it’s earning, which can stress its liquidity.
Spotting Cash Flow Trouble Early
Knowing how to calculate cash flow from operations may help you notice potential problems before they show up in ratios on your financial reports. Watch out for these early signs:
- Delayed payments to vendors: Consistently pushing back bills may signal that the business has limited available cash. It can also damage vendor relations.
- Aging accounts receivable: Overdue invoices or an increase in accounts receivable balances typically show that sales are not converting quickly enough.
Stronger business cash flow management may be enough to turn things around, especially when these issues are identified before they disrupt operations.
Practical Ways to Improve Cash Flow Right Away
Many effective cash flow management strategies focus on shifting the timing of money moving through your business. These steps can quickly strengthen your financial position without requiring major operational changes.
Speed Up Receivables
The faster customers pay, the sooner your business can use the cash. Offer a small discount to incentivize early payment. For example, 2% off the total bill for payments made in the first 10 days.
Switching to electronic invoicing and payment systems can cut processing times from weeks to days. B2B businesses may also consider requiring deposits on large orders or shorter payment terms for new customers.
Delay Payables Without Damaging Relationships
When owners aren’t sure how to manage cash flow, delaying vendor payments may seem unavoidable. But while this can buy you time, it can also damage vendor relationships, which may increase costs over the longer term.
To avoid this, negotiate longer payments up front. Many vendors will agree to Net 45 or Net 60 payments upon request, especially if you’ve been reliable. This can help you preserve the relationship while also keeping cash in your account longer.
Tighten Inventory Management
Money invested in unsold inventory can’t be used for other expenses. Regularly review your stock to identify slow-moving items. Then, consider reducing order quantities and running promotions to convert slow-moving inventory back into cash.
Cut Recurring Overhead
Audit your recurring expenses quarterly. Cancel unused services, negotiate better rates and evaluate whether each expense directly supports revenue generation.
These types of changes can compound quickly. For example, a business that shortens receivables by five days, extends payables by 10 days and reduces inventory by 15% could dramatically improve its cash position in just one quarter.
Using Cash Flow Insights to Extend Runway
Business owners often base growth or expansion decisions on revenue projections, but calculating cash flow lets you see your business from a different perspective. It can help you decide when to invest, when to hold back and how much flexibility you actually have. A plan that looks great on your P&L could potentially drain your accounts if the cash flow timing is off.
Before committing to making a major hire, aggressive expansion or significant purchase, run your cash flow forecast through three scenarios. A best-case scenario reflects strong sales and timely payments, while a base-case scenario illustrates realistic targets and normal delays. A worst-case scenario shows the impact of slower sales or late payments from key customers. If your worst-case scenario leaves you short on cash within a few months, consider adjusting your plans or securing financing in advance.
Banking Tools That Support Cash Flow Growth
The right banking tools can improve cash flow management and provide flexibility when timing is off. To protect liquidity and extend your runway, consider:
- Treasury management tools: Automate payments and collections, clearly see your inflows and outflows and view your current balance in real time.
- Linking your bank with ERP: Connect your banking data to your enterprise resource planning system to eliminate data entry, reduce errors and get a unified view of the entire company’s cash flow.
- Business credit card solutions: Manage expenses, extend payment cycles and track spending with greater control.
- Flexible credit lines: Smooth out cash flow cycles by covering gaps between payables and receivables without disrupting operations.
- Fraud protection tools: Safeguard funds and reduce the risk of unauthorized transactions that could drain available cash.
A dedicated banking Relationship Manager and Treasury Relationship Manager can help you choose the tools that fit your cash flow patterns and business stage.
Building a Culture of Cash Flow Awareness
Cash flow management is most effective when the entire team understands the impact of its decisions. Make sure managers and employees see how choices about spending, inventory and customer terms affect cash flow.
Schedule regular checkpoints focused on both cash flow and P&L to help identify potential issues sooner. Making this a part of every growth discussion helps to keep decisions aligned with available resources.
Put Your Cash Flow Insights to Work
Knowing how to calculate cash flow is step one. But the real value comes from acting on those insights and applying financial discipline.
The right banking service provider can offer support with strategies and tools to help keep cash flow strong as your business grows. Reach out to a Banc of California Relationship Manager to learn more.
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