How To Create A Cash Flow Chart In Excel

Why Cash Flow Is the Lifeblood of Business

Last Updated March 25, 2020

You've heard it said that cash flow is the lifeblood of a business. That's true for so many reasons. Although a lot of the money that's pumped into the business goes out quickly in taxes, expenses, and wages, having more money coming in the front door than going out the only way a business can grow and prosper. If you need to employ more staff, you'll need cash to pay their wages. If a new customer wants a large order, you'll need cash to pay for the materials needed to produce your product. How can cash flow be maximized to benefit the business?

Operating Cash Cycle

Time is money is another saying that's true of all businesses. The less time between releasing goods and being paid for them, the better the firm's cash flow will be. A business's operating cash cycle shows how long it takes for the cash spent with suppliers to be received back from customers when they pay their invoices. Shortening this improves your cash flow as the sooner you're paid for your goods, the sooner you can buy more materials to make more goods for other customers.

There's no simple calculation for shortening the operating cash cycle but there are some methods that all businesses can adopt to help them improve cash flow. Invoicing and payment terms are important ways you can help cash flow. If you pay your suppliers at 90 days for example but get paid by customers at 60 days, you'll be shortening the operating cash cycle. Simple things like invoicing as soon as the goods are shipped and getting the billing correct to avoid delays through queries are other ways you can improve cash flow.

Lease Don't Buy

As money comes into the business regularly, you should make sure your expenses also flow out of the business on a regular basis so avoiding major purchases by leasing supplies, equipment or real estate rather than investing in them helps keep your monthly costs down. This approach normally costs the firm a little more money in the long run but unless you're flush with cash, it's the best approach. Lease payments are a business expense so can be written off.

Credit Checks

Knowing who you're dealing with is the best way of making sure you don't do business with a firm who want to take your goods and run off without paying for them so investing in a subscription for a credit checking agency makes a lot of sense. While it's true that most businesses want to pay their bills and continue to trade, you only need a handful of suppliers withholding payments at the same time to cause you major cash flow problems.

Resellers

If you're a reseller of other people's goods, you need to check your inventory and see which items aren't selling well. The items that sell slowly tie up your cash so it's wise to sell them on, even if you do so at a discount. Sometimes it's hard to walk away from items you've invested in, but cash flow is so important that you need to be objective and get rid of the items that are in low demand to free up shelf space and cash for items that sell well.