A positive net cash flow is crucial for the day-to-day running of a business, and yet even profitable businesses can suffer with cash flow issues and face difficulties in providing their service.
In this article, we will highlight 10 useful methods we’ve provided to many of our clients that have helped them get back to a consistently positive net cash flow.
But first, let’s clarify what net cash flow is, where it fits into overall cash flow understanding — and, of course, why it’s so important.
Understanding cash flow
Cash flow is a term we use to describe how money flows in and out of your business, which is a crucial insight into how your business is balancing costs against revenue.
This is different to a Profit and Loss, where income that is owed to the business would still feature in the numbers; instead, a cash flow statement is concerned with what the business has actually paid out in cash and has already received in cash.
Keeping track of cash inflows and outflows ensures your business maintains sufficient funds to cover its expenses and stay operational.
Useful cash flow terms
Within ‘cash flow’, there are three other terms you’d need to know.
Inflows / Cash inflow
The ‘inflows’ (or ‘cash inflow’) would consist of income such as sales of products or services.
Examples of inflows:
- Sales Revenue: A company receives £10,000 from selling products.
- Loan Proceeds: A business secures a £50,000 loan from a bank.
- Investment Income: A business earns £2,000 in dividends from investments.
- Customer Payments: A client pays £5,000 for a service rendered.
- Asset Sales: The company sells old equipment for £3,000.
Outflows / Cash outflow
The ‘outflows’ (or ‘cash outflow’) would consist of spends the business makes on service provision, such as premises, staff, materials and manufacturing.
Examples of outflows:
- Rent Payments: A business pays £2,500 per month for office space.
- Employee Wages: A company pays £8,000 in salaries.
- Supplier Payments: A business pays £4,000 for raw materials.
- Loan Repayments: A business repays £1,500 of its bank loan.
- Utility Bills: The company pays £500 for electricity and water.
Net cash flow
Net cash flow is the difference between total cash inflows and total cash outflows over a period of time. It determines whether a business has a surplus (positive cash flow) or a shortfall (negative cash flow).
Most importantly, it reveals how much cash a business has at its disposal at any one time. A positive net cash flow is essential for keeping a business afloat.
Net cash flow formula
Let’s learn how to calculate your net cash flow, often referred to as the ‘cash flow formula’ or ‘cash flow equation’.
As mentioned above, subtracting outflows from the inflows gives us the ‘net cash flow’ number, which is either positive or negative.
Net Cash Flow = Total Cash Inflows – Total Cash Outflows
For example, Company A’s Inflows over a three month period were £15,000. The Outflows were £10,000, giving a positive net cash flow of £5,000.
At the end of an assessment period, we’re looking for a positive net cash flow to indicate that inflows are greater than the outflows.
TOP TIP
A net cash flow snapshot is an insight into what has already happened in your business and what you can react to.
The advantages of a cash flow forecast are that you can plan proactively with a pivot before a crisis or by doubling down on strategies that are working.
Why is it important to monitor net cash flow?
If we recall that cash flow is specifically concerned with money actively moving through a business’s accounts, we understand that net cash flow identifies the funds a business currently has available for day to day operations.
Proactively monitoring inflows and outflows to obtain a clear net cash flow figure can be the difference between insolvency and thriving in your business; comparing this one, clear metric over a period of months will give you a clear indication of whether your business is spending more or earning.
Why is this important?
- If you are spending more than you earn and have no usable cash in the bank, your business could be in serious trouble. Taking note of your net cash flow gives you time and space to address bad spending habits (outflows) and retain more cash in your business.
- If your earnings consistently exceed your spending, resulting in a positive net cash flow, you are more able to present positively to investors, plan for scaling and growth or ensure purchase of supplies and equipment for your business.
However, as with any metric in business, the number is often meaningless without the context, and this is certainly true of a net cash flow.
A Business Can Be Profitable but Have Poor Cash Flow:
A company may show a high profit on the income statement but struggle with cash flow if, for example, customers delay payments.
- Example: A business makes £50,000 in sales but only actively collects £20,000 in cash, leaving a cash shortage despite strong profits.
A Business Can Have Strong Cash Flow but Show a Loss:
A company may have a negative profit (loss) but still maintain a healthy cash flow by receiving loans or selling assets.
- Example: A business reports a £5,000 loss but has £20,000 in cash from a loan, keeping operations running.
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10 business tips and hacks to increase your positive net cash flow
Now we understand that net cash flow represents the funds your business has available to spend at any one time, we know that if your business doesn’t maintain a positive net cash flow, your business could be in serious trouble.
It’s a simple and harsh truth that even the most profitable companies face from time to time and so it’s important to optimise your business in order to maintain healthy cash flow.
At Palmer’s accounting, our net cash flow snapshots provide us with strategic insights on how our clients can maximise their inflows and minimise their outflows.
Here are 10 strategies we’ve recently advised to our clients, which you can try in your business.
1. Lease, don’t buy – Why Leasing for Business is Better than Buying
Since leasing supplies, equipment, and property usually ends up being more expensive than buying, it can seem to be a bit of a counterintuitive step.
However, buying business assets outright can significantly reduce your available cash, whereas leasing spreads the cost over time, reducing the immediate financial burden and preserving your net cash flow.
Unless your company always has a positive cash flow, you need to think about how to maintain a steady cash stream to keep day-to-day operations running. Leasing allows you to pay in small increments and helps improve cash flow.
How to leverage leasing in your business
- Lease office equipment instead of buying it upfront.
- Consider leasing vehicles to avoid large capital expenditures.
- Rent commercial space instead of purchasing property outright.
An added bonus is that lease payments are a business expense, and thereby can be written off on your taxes.
2. Offer discounts for customers who pay early
It’s said that “a bird in the hand is worth two in the bush”.
When it comes to maintaining positive cash flow so that you can continue to operate your business, ensuring customers are paying their invoices promptly is essential.
With this in mind, consider incentives to encourage your customers to pay their bills ahead of time and ensure you have received your Inflow when expected.
How to offer early payment discounts and incentives
- Offer a 2% discount for payments made within 10 days.
- Implement tiered discounts based on payment speed.
- Highlight early payment incentives on invoices.
It’s a win-win — your customers save money, and you improve your net cash flow.
3. Conduct customer credit checks
Late or missed payments impact your net cash flow.
If a customer is looking for extended payment terms, be sure to conduct a credit check, especially before you sign them up.
If the client has poor credit, there’s a real risk that you won’t be receiving payments on time, so you need to factor that in if you decide to take them on as a customer.
While it won’t eliminate the risk, try to set up their payment with a direct debit.
Methods you can use:
- Use credit agencies to assess customer reliability.
- Require upfront deposits for high-risk clients.
- Set up automatic direct debit payment options.
4. Form a buying group
Suppliers usually give discounts to large firms who buy in bulk, but don’t despair if you are a small business.
Simply think power in numbers!
By partnering with other businesses to buy in larger quantities, you can reduce costs and see that presented as an increased positive net cash flow.
For example, local cafés could team up to buy coffee beans or takeaway packaging in bulk.
Find other like-minded local companies willing to pool their cash in order to negotiate lower prices with suppliers.
5. Improve your inventory
Review the inventory of goods you buy that aren’t moving at the same pace as your other products.
They tie up a lot of cash and could hurt your cash flow.
Instead of buying more of what doesn’t sell, get rid of it, even if that means selling it at a discount. Storing these items incurs costs (outflows) and uses up valuable space and resources.
Be objective, not emotional, and if you’re not sure where to start, we’ll be more than happy to provide an independent viewpoint.
How to improve your inventory
- Identify slow-selling items and offer discounts to clear stock.
- Reduce over-ordering by tracking real-time inventory.
- Implement just-in-time (JIT) inventory management.
6. Send invoices out immediately
There’s no point in doing the work if you don’t then invoice for it immediately. Invoices should be easy to read, and the terms clearly stated.
Ensure that the due date is stated in a few places (preferably in bold), including at the top of the invoice and on the payment slip at the bottom.
Include clear instructions regarding payment types accepted and whether you accept credit cards.
If you charge late payment fees, make sure you include this information as well.
If you haven’t invested yet in invoicing software, you might want to give it some thought.
Invoicing software saves time and makes you more efficient.
We work with lots of different types of accounting software, so are happy to provide you with some advice and guidance.
Actionable tip:
- Use accounting software for auto-generated invoices.
- Include clear payment terms and due dates in bold.
- Offer multiple payment options, including online transfers.
7. Use Electronic Payments to Your Advantage
Keeping money in your account for as long as possible can massively help with any cash flow problems.
For this reason, if any of your accounts payable can be paid electronically, don’t pay the bill until the morning it is due.
Also, think about using a business credit card, especially those that also offer cashback.
This will help improve your cash flow, at least in the short term.
However, use credit cards responsibly — accumulating debt can quickly undo any short-term cash flow benefits.
How to use electronic payments to your advantage
- Schedule payments for the last possible due date.
- Use business credit cards with cashback rewards.
- Set up automatic payment reminders to avoid late fees.
8. Pay suppliers less – Negotiate Better Payment Terms with Suppliers
Building strong relationships with suppliers can lead to improved payment terms, allowing you to manage cash outflows more efficiently.
If you maintain friendly, regular communication with suppliers, you will have a better chance of landing those better terms.
As a reverse-engineered approach to our Tip Number 2, offer suppliers early payments if they’re willing to give you a discount in return. They have a positive net cash flow to maintain, as well as you do!
How you can negotiate better terms with suppliers
- Request extended payment terms (e.g., Net-60 instead of Net-30).
- Offer early payments in exchange for supplier discounts.
- Establish a long-term partnership for preferential pricing.
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9. Upsell to your existing customers
Increasing sales to current clients is often more cost-effective than acquiring new customers.
Very few businesses only sell one product or service, so review your existing client relationships and see if you can encourage them to spend more with you. Upselling and cross-selling can boost revenue and enhance net cash flow.
New clients are normally more expensive to service, so this is an easy way of increasing your cash flow with clients you trust to pay you on time.
How to get more sales from existing customers
- Offer premium service packages or add-ons.
- Introduce loyalty discounts for repeat customers.
- Bundle complementary products or services.
10. Increase pricing
Increasing your prices is a concept that scares many business owners, as they’re worried it will lead to reduced sales.
But it’s OK to experiment with pricing to find out how much customers are willing to pay.
Incremental increases can significantly enhance profitability without drastically affecting demand and you’ll probably find the person most worried about the price increase is you!
How to increase pricing in your business
- Conduct market research to justify pricing adjustments.
- Introduce small, periodic increases rather than one large hike.
- Offer added value to justify higher pricing.
After research, you may feel that marginal cost pricing would work in your industry or test a competitive pricing strategy.
To understand pricing strategies and how to use them to maximise profits, check out our post on The 7 most common pricing strategies for Maximum Profit
11. Bonus tip – Stay on top of powerful business insights
These ten tips are powerful strategic changes that will help all business owners drive growth and, critically, improve their net cash flow.
The bonus tip, which encompasses everything we’ve laid out in this article, is to stay on top of the numbers and pay attention to the details; they offer insights that truly help you avoid pitfalls and locate opportunities.
From the cash flow forecast, mentioned earlier, to assessing profit and loss statements or keeping an eye on your gross profit margin, these metrics are all powerful business insights that lead to proactive, data-driven decision making for profit.
How to stay on top of powerful business metrics
- Keep regular records of cash flow, profit and loss metrics.
- Actively review them on a set and regular basis and summarise where you stand
- Make plans as a result of your review summary, such as “cutting back on costs” or “prioritising a successful product in the next quarter”
Need more advice about improving your cash flow and increasing your net cash flow?
Healthy cash flow is the result of operations that run efficiently and smoothly.
While implementing some or all of the above ten steps will help you increase your business’s net cash flow, you’ll also want to make sure you’re making the right decisions regarding your marketing, customer service and product or service development. Becoming more mindful of these smaller aspects of business greatly impacts your gross margin.
That’s where we come in.
As experienced accountants in Aylesbury, who offer a range of tax accountancy, and business growth services, we’re here to help you review your business plan on a regular basis to ensure you anticipate trends and challenges before they impact your profitability.
Contact us today for more help and advice. We look forward to speaking with you!
Frequently Asked Questions about Cash Flow and Net Cash Flow
How do you work out net cash flow?
The net cash flow forecast formula is simple, but it does require a lot of backend work to effectively identify all outflows and inflows that are included in the calculation.
Subtracting outflows from the inflows gives us the ‘net cash flow’ number, which is either positive or negative.
Net Cash Flow = Total Cash Inflows – Total Cash Outflows
For example, Company A’s Inflows over a three month period were £15,000. The Outflows were £10,000, giving a positive net cash flow of £5,000.
At the end of an assessment period, we’re looking for a positive net cash flow to indicate that inflows are greater than the outflows.
Why is it important to monitor cash flow?
Monitoring cash flow ensures your business maintains a healthy level of cash which is essential to pay the running costs and obtain supplies.
A business with cash flow difficulties cannot function and continue to earn revenue.
What are the advantages of a cash flow forecast?
A cash flow forecast enables you to be proactive in your business by responding ahead of time, either to avert a crisis or plan for scaling and growth.
Crunching the numbers to see expected cash flow is a strategic method to assess where your business will be at a particular moment in time.
Is cash flow the same as profit and loss?
No, cash flow and profit are not the same, though both are important financial metrics.
Profit, as shown in the Profit & Loss Statement (Income Statement), is the financial gain after deducting expenses from revenue. It includes non-cash items like depreciation and unpaid invoices, focusing on overall financial performance over a period.
Cash flow, on the other hand, represents the actual movement of money in and out of a business, as recorded in the Cash Flow Statement.
It excludes non-cash transactions and instead reflects real-time liquidity, showing whether a business can meet its short-term obligations. A company can be profitable but still experience cash flow difficulties if payments are delayed or expenses exceed available cash.
This is why monitoring net cash flow is crucial for maintaining financial stability and ensuring the business has enough liquidity to operate effectively.
