What is cash flow and how to improve it

Senior Portfolio Executive
Finance and accounting
businesswoman at desk filling out paperwork

No matter the strength of your business proposition, cash flow is crucial. 

Even businesses that are making a good profit can struggle due to a lack of cash. They might be unable to grow or secure financing, or in the worst case scenario, go out of business. The good news is that just by taking some small steps, you can make a real difference to your company’s cash flow. In this article, we’ll explain what business cash flow is and give some tips on how you can improve and effectively manage your cash flow.


What is cash flow?

Cash flow is the amount of money moving into and out of your business over a given period of time. If more money is coming in than going out, you have positive cash flow. If more money is going out than coming in, you have negative cash flow.

Proper cash flow management is important as it allows your business to meet its financial obligations and can also enable you to invest in growth. 

The cash flow statement categorises cash flows by operating, investing, and financing activities. Let’s take a look at these three types of cash flow:

Operating cash flow 

Operating cash flow refers to the amount of cash that is generated or consumed by your company’s core operating activities within a certain timeframe. These activities include generating revenue from customer sales, paying expenses, or funding working capital. Operating cash flow indicates your company’s ability to generate enough cash from its typical operations to cover its short-term debts and other financial obligations. 

Investing cash flow

Investing cash flow relates to the cash generated or spent through your business’s investment-related activities, such as purchasing long-term assets like property or equipment, buying other businesses, and investing in marketable securities like stocks and bonds. A negative investing cash flow isn’t necessarily a bad sign, as it can mean that a business is investing cash into the future growth and long-term health of the company. 

Financing cash flow 

Cash flow from financing activities relates to the cash coming into or going out of your company from sources of financing. Examples of financing cash flow items include taking out loans, repaying existing loans, issuing new equity, and paying dividends.


How to improve cash flow

1. Cash flow forecasting

It’s important to identify cash flow shortfalls in advance, as it will give you time to consider your options and engage early with customers, suppliers, and external funders. This is where a [cash flow forecast] comes in. 

What is a cash flow forecast?

A cash flow forecast is a financial planning tool that helps you predict your company’s future cash balances by estimating its cash inflows and outflows over a specific impending period of time. 

By anticipating how much money will be coming in and going out, businesses can identify any upcoming cash shortages and take steps to avoid the shortage or mitigate its impact. 

Cash flow forecasts can cover anything from a few weeks to a year – the forecasting period you choose will depend on factors like your company objectives, how new your business is, and the data you have available. However, the further into the future you forecast, the less accurate your projections become. 

Many businesses use a “rolling” cash flow forecast, meaning that they continuously adjust it – typically on a weekly or monthly basis – to ensure it stays up to date with any developments that have occurred since the last forecast. Regular [cash flow forecasting] is particularly important in uncertain market conditions.

The Business Wales website has more information and provides a cash flow template to help you create a forecast. 


2. Monitor cash flow regularly

There is a great selection of online cloud accounting software available, such as Sage, QuickBooks, Xero, and FreeAgent. These tools make it easier to regularly upload and receive up-to-date information.


3. Instil robust credit control

No business will choose to turn away trade, but a robust credit checking procedure should be followed before offering clients credit terms. In addition to carrying out credit checks, here are some other steps you can follow for effective credit control:

  • Send invoices out promptly and make sure they contain the correct information. This will increase the chances of getting paid quickly
  • Make sure payment terms are clear from the outset, so that there’s no confusion about when payment is due and what the consequences are if it isn’t received on time 
  • Have a clear plan in place for late payments. Following up on late payments can be time-consuming; you could consider using software that will automate invoicing and invoice chasing 

Regularly review and update your credit control policy to make sure it reflects any changes in the business landscape 


4. Review payment terms with longstanding suppliers

Are you paying suppliers too soon? Is there opportunity to negotiate extended payment terms? It might be worth opening up discussion. If you are struggling to make payments to HMRC, contact them on 0300 200 3835 to discuss your payment options.


5. Cut unnecessary costs

Review your company expenses and see if there are any costs you can easily cut back on. Look at recurring costs in particular – for example, are you paying for subscriptions you no longer need?


6. Sell non-essential assets

You could sell assets that are unproductive or no longer used to generate cash.


7. Convert old inventory into cash

Clear out old and excess inventory that is typing up capital, for example by discounting items, selling them on online marketplaces, or bundling them.  


8. Lease rather than buy

Leasing equipment rather than purchasing it upfront could allow you to preserve cash flow. Having a series of small, fixed payments should also make budgeting easier. If you’re already leasing, consider renegotiating the terms.

While this route could improve cash flow, you would also need to consider the overall cost, as it could end up costing you more in the long run. Read our blog post How to use asset finance to grow your business to learn more about the various types and benefits of asset finance.


9. Incentivise early payments

If your profit margins allow, offering discounts on early payments to selected customers might be an option to strengthen cash flow.


10. Offer multiple payment options

Making it easier for customers to pay you will help you get your money quicker. Provide them with several options, including credit cards, online payments, and electronic transfers.


Ultimately, cash flow is the lifeblood of your business and can give you the platform you need to effectively manage and develop your company’s future. Taking advice from an accountant could help you understand your cash flow better and spot potential problems early on.