6 tips to keep a positive cash flow

6 ways to sustain positive cash flow

Follow these tips to make sure you consistently have more money on hand than you’re spending:

1. Track cash flow with a budget

The first step to keeping a positive cash flow is to set up a system to monitor your cash inflow and outflow.

Here’s a simple way to calculate your net cashflow for the past month in two steps:

1. List cash inflow. List the amount of funds you have on hand that you can access right now — including bank account balances and accounts receivables that were filled this month.
2. Subtract cash outflow. Deduct all costs you paid last month, such as monthly debt repayments, operating costs and investments.

If you end up with a positive number, that means you have a positive cash flow. A negative number indicates a negative cash flow. Even if you get a negative result, you’re on the right track: You know exactly where you stand.

2. Keep spending in check

Regularly audit your company’s spending to find places where you can cut back. This can help maintain a positive cash flow by reducing your cash outflow.

You might want to reduce spending in one of the following ways:

• Regularly renegotiate contracts. If you’re working with a contractor or supplier, regularly renegotiate the price to get more for your money.
• Compare lenders if you borrow. You likely won’t get the best deal on a business loan if you just go with your bank. Other lenders might offer more competitive rates and terms.
• Cut redundant insurance. Review your insurance policies to make sure you aren’t doubling up on coverage, and cut any unnecessary policies.
• Build in-house teams. If you’re going outside for marketing, accounting or development, setting up a team within your company could help cut those costs.
• Pay off interest-earning debt early. The longer you wait to pay off a credit card balance or a loan, the more you’ll pay in interest. Just make sure your lender doesn’t charge a prepayment penalty.

3. Track your receivables

Stay on top of clients who owe your company money — and make sure you aren’t late sending out invoices. The best way to do this is to create a detailed list of how much money you’re owed from each customer with dates for each transaction. And make sure to update it regularly, including when you last followed up about repayment.

4. Boost your cash inflow whenever possible

You should always be striving to increase your cash inflow to help cushion your business against stagnating or falling into debt.

Here are a few strategies you can take to achieve this:

• Raise prices. One method is to increase prices on your products and services — but make sure you research your market to make sure you’re not overcharging and driving away customers.
• Ask for deposits. Consider requiring a deposit or advance payment on larger orders to ensure you have at least some of your payment up front.
• Open a high-interest checking account. Keep your funds in an interest-earning checking account to let your money grow naturally over time.

5. Don’t accept late payments without a penalty

Charging a late fee gives your client an additional incentive to pay on time — and if they don’t, you’ll make more of a profit. Make sure you’re up front about the late fee policy, and send your invoices on time before you start charging a penalty. Typically, businesses impose late payment fees on their clients 30 days after the due date listed on the invoice.

6. Apply for a line of credit

A line of credit can give your business access to cash during those months when you aren’t bringing in as much as you spend every day. It’s best to apply during the season when you have the most consistently positive cash flow — if you have one — to get the best deal.

Compare factors like rates, fees, terms and how repayments work before you decide on a lender. And ask your bank if you can qualify for a customer discount.

Bottom line

Cash flow measures how much money you have available to you on any given day, and having inconsistent cash flow can make it difficult to carry out operations. But staying on top of your receivables, cutting back on unnecessary costs and tracking your incoming and outgoing cash can help you avoid too many negative days.

If you need financing to cover the occasional cashflow gaps, check out our guide to business loans to compare your options.

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Frequently asked questions

• Is negative cash flow always bad?

  Not necessarily. A few periods of negative cash flow are common, especially if your business experiences seasonality in sales. In some cases, a negative cash flow might be necessary if you want to make an investment with a high return — which could mean a higher net profit than you would have had otherwise. But consistently negative cash flow can often mean your business is in trouble.

• Does positive cash flow mean profit?

  Not necessarily. You can maintain positive cash flow by taking out a loan or withdrawing from a line of credit, even if your company didn’t earn more than it spent over a period of time.

• Is cash flow more important than profit?

  It depends on your business. Cash flow is generally necessary to generate profit. If your business is struggling to fill orders because of a cashflow gap, then you might be required to improve your cashflow situation before you can make a profit.

  However, you might have a negative cash flow if your business invested in new equipment that would increase your output and therefore your profit, making profit more important than cash flow in that particular situation.