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What is positive cash flow? | How to keep your cash flow positive | Chaser

What is positive cash flow? | How to keep your cash flow positive | Chaser

Positive cash flow is the lifeblood of any successful business. It represents the amount of cash a company generates from its normal business operations, which is used to pay for expenses and invest in growth. Having a positive cash flow means that the money coming in is greater than the money going out, allowing businesses to operate smoothly and have more money to cover any unforeseen expenses.

However, maintaining a positive cash flow can be challenging, especially for smaller businesses without large financial reserves. This article will provide some tried and tested strategies to help you keep your business cash flow positive to sustain long term growth.

Positive cash flow is the lifeblood of business, fueling day-to-day operations and providing a financial cushion for unforeseen challenges.


Positive cash flow is the lifeblood of business, fueling day-to-day operations and providing a financial cushion for unforeseen challenges.

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Understanding positive cash flow

At its most basic, positive cash flow is when cash inflows are higher than cash outflows in a given period. Essentially, this means that more cash is coming into your business than going out of your business.

Positive cash flow can be achieved through various means, such as increasing sales, reducing expenses, or securing financing. Positive cash flow is important to maintain as it allows businesses to have enough cash on hand to cover day-to-day operations and other financial obligations while simultaneously investing in growth opportunities.

A positive net cash flow shows that your business is moving in the right direction and can be seen as a significant barometer of good financial health. 


Why is positive cash flow important?

Positive cash flow helps businesses stay solvent and provides the necessary funds for growth.

Having a positive cash flow also allows businesses to take advantage of opportunities such as investing in new equipment, hiring additional staff, making dividend payments, or expanding operations. Without it, businesses are limited in their ability to grow and thrive.

Businesses need to have positive cash flow because it ensures they have enough funds to cover their regular expenses and invest in growth opportunities. It also provides a financial cushion to weather any unexpected problems that may arise.


How will a negative cash flow impact the business?

In contrast to positive cash flow, negative cash flow is when the company's operating expenses are higher than its sales revenue. This can extend to non cash expenses, as well as interest payments on loans or indirect issues like depreciation.

Unfortunately, negative cash flows can quickly lead to financial trouble including long term debt that continues to grow until the company's cash flow issues are rectified. While a net loss in any given period may be nothing to worry about, a situation that isn't appropriately managed can even lead to bankruptcy and insolvency.

As a business owner, addressing the operating cash flow is essential. Otherwise, the net loss and negative cash flow could jeopardise the future of the entire company.


Positive cash flow example

Understanding the fundamentals of how to calculate your cash flow is very simple when you look at an easy positive cash flow example.

If a company's cash generated figure for a month was £100,000 while its expenses were £70,000, its net positive cash flow would be £30,000.

When detailing cash coming in and going out of the company, accrued expenses will be broken down into several categories while they may also cover capital expenditures as well as ongoing operating expenses and fixed costs. Therefore, in the above positive cash flow example, a financial statement may look like this:


Month: January

Revenue: £100,000

Refunds: £0

Net Revenue: £100,000

Cost of goods sold: £35,000

Gross profit: £65,000

Operating expenses

Salaries: £20,000

Mortgage: £7,500

Travel: £2,500

Advertising: £5,000

EBITDA: £30,000


The difference between cash flow and profit

While positive cash flow is undoubtedly crucial for businesses, it's important to note that profitability is not the same. Cash flow represents the money coming into and going out of a business, as well as the cash equivalents, whereas profits remain after all expenses have been paid.

As such, the cash flow statement will look different to a profit and loss statement. Perhaps the easiest comparison is that net profit and gross profit shown on a P/L statement show that the company is making money while a statement showing a positive cash flow confirms that you have enough money to pay the bills and cover any accounts payable within this period.

A business can have positive cash flow but still operate at a loss if its expenses exceed its revenue. Similarly, a business can have negative cash flow but still be profitable if it has enough reserves to cover its costs. In other words, knowing how to calculate cash flow will simply show you whether the cash acquired during a set period outweighs the cash spent or vice versa.

Understanding the difference between cash flow positive and overall profit is essential for businesses to make informed financial decisions and ensure long-term success. Ultimately, though, when money flows into the company at a faster rate than it leaves, it will have an immensely positive impact while also suggesting that an operating profit will be achieved.


How to keep your business cash flow positive

You can take several steps to maintain a healthy, positive cash flow for your business operations. Here are some of the best strategies to support your operating cash flow to ensure that you have more money coming into the business than your cash outflow figure.


Efficient expense management

Expenses represent a significant part of any business's cash outflow. To keep your cash flow positive, managing expenses efficiently and looking for ways to reduce costs without sacrificing quality is crucial.

Some ways to cut expenses without compromising quality include negotiating better deals with suppliers, finding alternative suppliers or vendors, and identifying areas where you can automate processes to save time and money. Reducing cash outflows will continue to support your financial health month after month.

Consistently reviewing and managing expenses can help businesses maintain a healthy cash flow and improve overall profitability, not least because it will release more cash to invest in additional items such as liquid assets. 


Effective credit control

Unpaid invoices can quickly become a significant hurdle for businesses trying to maintain a positive cash flow, which is why you cannot afford to ignore your accounts receivable. Implementing an effective credit control process, such as sending reminders and following up on overdue receivables, is essential in ensuring timely customer payments and consistent cash inflows.

Chaser's automated credit management solutions can help businesses save time and improve cash flow by automating the invoice-chasing process without losing the personal touch. With cash coming in on time, your working capital will look far better while there will always be enough money to handle financial obligations.


Create a realistic budget

Budgeting is another crucial aspect of managing cash flow effectively. Businesses should create a realistic budget considering all expenses and expected cash inflows to ensure they have enough funds to cover day-to-day operations and invest in growth opportunities.

Data from previous years can help create a realistic budget, but it's essential also to factor in any changes or unexpected expenses that may arise. In turn, your forecasted operating cash flow figures will facilitate more calculated decisions.


Monitor and reduce overhead costs

A business's overhead costs, such as rent, utilities, and insurance, can quickly increase and impact its hopes of creating a positive cash flow. Regularly monitoring these costs and finding ways to reduce them won't only reduce the financial pressures. it will also actively boost your net cash figures.

Some strategies businesses can use to reduce overhead costs include downsizing office space, renegotiating leases or contracts, and switching to energy-efficient options. In turn, you will have more cash left over for financing activities, paying dividends, and generally growing the company. 


Boost revenue streams

If efficient expense management keeps costs down, boosting revenue streams is the other side of the coin that can strengthen your income statement, help increase cash flow, and ensure that more cash is available to satisfy various financial obligations.

Businesses can explore various options to generate additional income, such as creating new products or services, targeting new markets, or offering discounts or promotions to encourage more sales. Investing activities may also be utilised to create new streams.

Regularly reviewing and analysing revenue streams and the amount of money a company receives through its operating activities and investment income strategies can help identify opportunities for growth and ensure their cash flow remains positive.


Diversify your products or services

Diversifying revenue streams is an effective way for businesses to spread out their risk and avoid relying on a single source of income. Offering new products or services can attract different customer segments and provide alternative sources of revenue.

Businesses can also consider diversifying through partnerships or collaborations with other complementary businesses, allowing them to reach new markets and generate additional income. Investing cash flow in this way also creates fluidity and flexibility, which can also feed into the process of building a cash flow positive. 


Increase sales and marketing efforts

Marketing is often one of the first areas businesses cut back on when trying to reduce expenses. However, increasing sales and marketing efforts can also help boost revenue and maintain a positive cash flow.

Content and social media marketing are low-cost, practical ways for businesses to increase their online presence and attract potential customers. Assuming this leads to increased conversions, the added revenue will subsequently support a cash flow positive. Investing cash flow in this way is essential for ongoing growth.

Businesses can explore new marketing channels or invest in targeted advertising campaigns to reach a wider audience and attract more customers. They can also implement loyalty programs or referral incentives to encourage repeat business and word-of-mouth promotion.

Optimised pricing strategies can also help increase sales and improve cash flow by capturing the most value from each transaction. However, it is important to remember that focusing on increasing sales alone does not necessarily mean you will improve your cash flow, and other considerations must be taken into account.


Manage your accounts receivables effectively

Accounts receivables, or the money owed to a business by its customers, can significantly impact cash flow. A proactive approach to managing accounts receivables, such as sending timely invoices and following up on overdue payments, can help ensure a steady cash flow into the business.

Using accounts receivable software can automate the process, leading to a situation where free cash flow is easier to maintain.


The role of accounts receivables in cash flow

Your business's accounts receivables represent money you have earned but have not yet received. This can create a gap between the time when you provide goods or services and when you receive payment, impacting your cash flow.

Proper accounts receivables management is crucial to ensure timely payment and maintain a positive cash flow. Failure to do so can lead to significant payment delays and potential issues with financing cash flow in the immediate or mid-term future.


Strategies for managing accounts receivables

There are a range of strategies businesses can use to manage their accounts receivables effectively. Some tips that will help free cash flow include:

  • Clear and detailed invoices - Providing clear and precise invoices can help reduce confusion and potential payment delays.
  • Offering multiple payment methods - Accepting various payment methods, such as credit cards or online payments, can make it easier for customers to pay quickly and efficiently.
  • Regularly reviewing ageing reports - Ageing reports can help businesses identify overdue payments and take proactive steps to follow up on them.
  • Offering incentives for early payment - Providing discounts or other incentives for customers who pay early can motivate them to pay on time, improving cash flow.
  • Establishing a collections process - An established collections process can help businesses follow up on overdue payments and take necessary actions, such as working with a collection agency, to recover unpaid debts.
  • Utilising accounting software for tracking - Using accounting software can help businesses track and manage their accounts receivables efficiently, reducing the risk of errors and delays.


These strategies, combined with efficient expense management and revenue-boosting efforts, can help businesses maintain positive cash flow and ensure long-term financial stability.


Other tips for keeping your cash flow statement in good health

In addition to budgeting, managing expenses and revenue streams, and effectively managing accounts receivables, there are other strategies businesses can use to maintain a positive cash flow.


Effective inventory control

Inventory control is crucial for managing and financing cash flow, as excess inventory can tie up valuable resources and impact the business's ability to invest in growth opportunities.

Just-in-time inventory practices can help businesses optimise their inventory levels, ensuring they have enough products to meet demand without overspending on storage and management costs.

Regularly reviewing and optimising inventory levels can help businesses maintain a healthy balance between meeting demand and avoiding overstocking.


Procure emergency funds

Having access to emergency funds can provide businesses with a safety net in case of unexpected expenses or cash flow challenges. Businesses can explore options such as business lines of credit, small business loans, invoice factoring, or merchant cash advances to help cover short-term financial needs.


Staying positive

Maintaining a positive cash flow ensures businesses have the necessary resources to operate, invest in growth opportunities, and withstand unexpected financial challenges. 

By regularly reviewing and analysing their budget, expenses, revenue streams, accounts receivables, inventory levels, and emergency fund options, businesses can set themselves up for long-term success and financial stability.

Effective automated credit control and accounting software can also streamline and simplify the cash flow management process, allowing businesses to focus on their core operations.

Chaser's automated credit control platform offers businesses an efficient and user-friendly solution for managing accounts receivables, reducing overdue payments, and improving cash flow. With features such as automatic invoice chasing, personalised email templates, and detailed reporting, Chaser can help businesses maintain a positive cash flow while saving time and resources.

Easily integrated with popular accounting software such as Xero, QuickBooks, and Sage, Chaser can seamlessly fit into your existing workflow and help streamline your credit control process.

To learn more about how Chaser can help your business, book a demo with one of our experts or start your 10-day free trial today.

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