Calculating your business’s operating cash flow is a vital tool used in determining the financial success and stability of a business. It is the first thing to appear on a cash flow statement and represents the cash impact of net income from all primary business activities. That means that only activities dealing with actual cash exchange are calculated in your operating cash flow.
Because cash flow is relatively easy to calculate, appears on your cash flow statement prominently, and has immense bearings on your day-to-day ability to run your business, maintaining a positive cash flow is vital to maintaining a healthy business.
What is positive operating cash flow?
A positive operating cash flow is a net balance on the cash flow statement for a business over a given period that is greater than zero. This is the cash you have on hand for operating your business without having to borrow any further funds.
Positive operating cash flow shows that you have enough money to cover bills, but a consistently positive operating cash flow can also indicate that the business is able to add to its assets and expand.
This is not to say that cash flow is the most important part of your books, but looking at cash flow can give you and your investors a broad picture of the business before you start looking in more detail.
How do you create a positive cash flow?
There are multiple ways to create a positive cash flow, but not all of them will be good for a business in the long run. Consider the sale of assets below market value: although the influx of cash will represent a positive result in your cash flow, it is not good business practice or a good reflection on how your business is performing.
Ideally, you should be working constantly on maintaining positive cash flow through small but significant steps, rather than only checking on your cash flow periodically and hoping for the best.
- Identify risks
Risk analysis is vital, even in the smallest businesses. Consider what you would do and what your business would need in order to survive the worst-case scenario and see if that impacts the way you are running your business.
- Plan ahead
At some point you will probably need to invest in new equipment or upgrades. A huge expense can damage your cash flow positivity so plan for any foreseeable expenses and then stick to your budget.
- Monitor your inventory
Avoid tying up cash in inventory by carefully monitoring the movement of inventory. Only stock what is necessary and essential.
- Implement better cash flow strategies
Invoice your clients promptly, know when and how to send reminders, and have a follow-up plan for late payments. Accounts receivable that are paid within 15 days or less can significantly improve cash flow performance.
You should always know exactly how much is owing to you and how much you owe – and how long any debts or credits have been in place. If you don’t have a system or software to manage this, now may be the time to invest.
- Take your time paying out
Although it may be tempting to pay off debts as quickly as possible, keeping cash within your business means you have more funds to work with until that debt is due. Using company credit can quickly increase operational cash flow.
Just make sure you avoid penalties and late fees. These are easy to avoid but can wreak havoc on a cash flow if you don’t.
- Cut costs
It sounds silly, but once your business gets going and you are spending more time on other aspects of your business, it is easy to stop looking carefully at where you could be saving money. Do regular checks on all your outgoings to make sure you still have the best deal. This could be insurance policies, rent, suppliers, or even where you buy your tea and coffee for staff meetings.
- Check your interest rates
Some accounts allow you to earn more money on your funds than others. Use interest-earning accounts to boost your cash flow but be wary of long-term certificates of deposit that require payment for early withdrawal. Remember, you need your cash to be available to you at fairly short notice.
- Consider alternate revenue sources
This is particularly important for seasonal businesses, but applies to everyone to some degree. Consider your premises, your services, your stock, your expertise, and anything else you can think of and actively consider if there are ways to create new income streams.
How do you turn a negative cash flow into a positive cash flow?
If you are looking at a negative cash flow balance now, there is still hope. This doesn’t mean your business isn’t profitable, but you should take steps to create a positive cash flow from a negative cash flow.
Start by going through all the steps above as these will already help you to get your business back onto the right track. In addition, if you have a negative cash flow, consider:
- Analysing financial statements
You may want to do this yourself or get an accountant to help you. But the best place to start is to see exactly where your cash is at any given time. This will help you understand where to start in reclaiming your cash flow.
- Cut expenses
Overheads and operating costs are where most money goes. Evaluate your outgoings and see where you can cut costs.
- Raise prices
If you are in a position to charge more for your goods and services then raising prices can help you restore a positive cash flow. Work within industry standards to stay competitive or trial new prices before implementing them completely if you are concerned about losing too many clients.
- Work with your business partners
If your cash flow outlook is terrible then it may be time to talk to vendors, lenders, and investors. If you have a good standing with them then you may be able to reorganise payment terms or increase investments which will improve the outlook of your cash flow significantly.
- Evaluate customers
If you have debtors who regularly make late payments or need you to make special arrangements for them then it may be time to cut them loose. This may seem counterintuitive as you are losing a customer, but it frees you up to work with someone else who pays on time and allows your business more freedom through a healthier cash flow.