Cash flow is an easy enough equation. It is a reflection of the flow of business or cash received versus its outflow or money spent. You may have heard these accounts referred to as accounts receivable and accounts payable.
Let’s keep things simple.
If your business makes more money than it spends, it has positive cash flow. If the opposite is true, your business has negative cash flow. No state is permanent, and cash flow can fluctuate throughout the year due to factors such as your industry, sales cycle, supply chain and one-off expenses.
Generating cash flow is a less proactive business decision and is a natural occurrence in the business cycle. When trying to overcome negative cash flow problems, an obvious choice is to increase profits. But this is easier said than done. This is why businesses focus on the other side of the equation – cost reduction.
Reducing expenses by cutting costs may seem like a simple solution, but the effects can be huge. Let’s examine how businesses can reduce their outflows and how cash management can help create cash flow.
It’s a trim, not a shave
Cost cutting can sometimes be confused with eliminating them altogether. “Cost reduction” might be a better way to phrase it, and it comes with many possible options. Here are some.
Supplies and equipment for production, land for buildings, inventory for sale. Many businesses choose to purchase these items. But for cash flow purposes, leasing can provide a positive boost because it results in smaller, scheduled payments, freeing up cash for more immediate business needs. Also, lease payments can be written off as a business expense on your taxes.
Certain recurring expenses are the cost of doing business and are included as accounts payable. They include things needed to operate, such as rent, supplies and payroll. Others, such as subscription services that continue past their intended use, may be missed when managing cash flow.
That is why it is important to have an effective review process, such as the balance sheet draft. This process can help eliminate these outliers and create positive cash flow.
Strategic purchasing is less about cutting costs and more about timing their impact when the business has more cash on hand. This can take a simple form, such as negotiating end-of-month payments with suppliers. Or the timing can be complex, such as incremental pay schedules revolving around the business’s revenue stream. Either way can help contribute to better cash management.
To save money, business owners can get creative with purchases. Buying in bulk is an option, as suppliers offer discounted rates for larger purchases. Some businesses with similar supply needs choose to form cooperatives to pool their purchasing power.
Plug the holes, stay afloat
Maintaining cash flow is important for any business. Take a look at your own business to see how you can find a sustainable, positive cash flow:
- Rent instead of buy
- Review expenses for outdated or unnecessary costs
- Look for ways to expand or increase purchasing power
Many cost factors are unique to each industry and individual business, but it remains the same: reduce expenses and create positive cash flow. Connect with a Chase business banker to discuss how you can improve cash flow for your business.
For Information/Educational Purposes Only: The views expressed in this article are those of JPMorgan Chase & Co. May vary from other employees and departments. The ideas and strategies described may not be suitable for everyone and are not intended as specific advice/recommendations for any individual. . Information obtained from sources believed to be reliable, but JPMorgan Chase & Co. or its affiliates and/or subsidiaries do not warrant its completeness or accuracy. You should carefully consider your needs and objectives and consult with the appropriate professional(s) before making any decisions. Outlooks and past performance are not guarantees of future results.
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