5 ways to maintain a positive cash-flow

Managing your business comes with many requests that are not always easy to approach, one of the most complex and challenging being cash-flow management. 

It’s a trap to consider that consistently focusing efforts on bringing new revenue to your company, concentrating on development and profitability, will continue to survive and grow. 

However, without rigorous planning of the funds available to pay salaries, suppliers, or taxes on time, your business is at risk of stagnation or failure.

Maintaining a good long-term liquidity

Cash flow is not only essential from the perspective of ensuring working capital, it is also a critical factor that business partners – suppliers or financiers – will look at before approving any type of credit, whether commercial or financial.

Therefore, it is important that the liquidity improvement solutions you employ are not just short-term but bring benefits in the long-term. Thus, it is useful to focus on using operational methods that, in addition to supporting positive cash-flow, also prevent future liquidity challenges.

The main causes of liquidity challenges

A first step in choosing the most appropriate solutions for the liquidity challenges that your business may face is to review their potential causes to identify areas where operational measures can be implemented to improve the situation, if necessary. 

The reasons behind a liquidity shortfall can sometimes be controlled from a business management perspective. They can range from low profits or even losses that arise from unforeseen market changes – sometimes leading to arrears to the government or creditors – to a relative lack of planning. 

In other cases, the nature of the business itself may present challenges in cash-flow management from the outset. 

A typical example is when a company faces seasonal fluctuations in sales.

The compromise between accelerated growth and maintaining positive cash flow

In addition, certain decisions you make to grow your business can, under certain conditions, come with a hidden cost, putting high pressure on the availability of working capital. 

This category includes, for example:

• sales that exceed administrative capacity (sometimes referred to as “uncontrolled growth”);
• excessive investments in increasing production or distribution capacity;
• poor inventory control;
• overly flexible lending policies, driven by a desire to support a positive trend in revenue.

Methods for maintaining a positive cash-flow

• Renegotiate contracts and terms.

Entrepreneurs can negotiate more favorable terms with business partners to improve cash flow. For example, extending the payment term to certain suppliers from 30 to 60 (or even 90) days allows the business to have access to funds for a longer period of time. 

Negotiating the distribution of payments can also be useful. For example, a retail business with significant seasonal sales fluctuations could benefit from an adapted distribution of rent or leasing payments, with higher rates during periods of increased sales and reduced rates during the rest of the year.

• Improve the billing process.

Investing in automating the billing system will always generate benefits in terms of improving cash flow. 

These include shorter periods for transmitting invoices to clients, reducing delays in issuing invoices, reducing billing errors, better tracking of customer payment characteristics, as well as reducing costs associated with collecting overdue debts.

• Optimize expenses

Rigorous budgeting exercises will always offer opportunities to reduce the non-essential business expenses without prejudicing revenue generation. 

Savings can be achieved either by eliminating waste (for example, by constantly adapting budgets to the real needs of departments by rethinking cost structures) or by changing suppliers or renegotiating prices for support services to the most advantageous offers on the market (for example, telephony, internet, IT services).

• Monitor and control growth.

Increasing revenue is generally rewarding for entrepreneurs. As mentioned earlier, however, there are situations where significant, unchecked, and unchecked growth – in conditions where it generates significant cash-flow deficits through abrupt increases in operational expenses and future receivables – can jeopardize the solvency of a business.

• Track faster collection of receivables

Faster collection of receivables has an immediate positive impact on liquidity. You can achieve this through a multitude of approaches, and you can choose the ones that are most suitable for your business:

• Automate the collection process through direct debit – encourage customers to enroll in a billing process in which the amount owed is automatically debited from their bank account or based on a credit card on the same day of each month, if possible;
• Accept online payments – offer the possibility of immediate payment with a credit card, even at the moment of viewing the invoice transmitted electronically to the customer, facilitating collection;
• Allow customers to choose the due date within the month – a flexible approach to the due date, adapted to the specific needs of each customer, encourages prompt payments;
• Use factoring for issued and outstanding invoices by relying on alternative financing – collecting invoices at maturity can be done easily and quickly by using this modern financing instrument, which offers an alternative to traditional loans, allowing the immediate conversion of your company’s receivables into cash. 

Furthermore, using factoring is an ideal solution in periods of significant growth, allowing you to take advantage of sales opportunities without prejudicing your business’s liquidity.