Cash flow is a fairly simple equation. It reflects a company’s inflow or money received versus its outflow or money spent. You may have heard these referred to as receivables and payables.
Let’s keep things simple.
When your business makes more money than it spends, it has positive cash flow. If the opposite is true, your business has negative cash flow. Neither state is permanent, and cash flow can fluctuate throughout the year based on factors such as your industry, sales cycle, supply chain, and one-time expenses.
Creating cash flow is less of an active business decision and more a natural occurrence in the business cycle. When trying to overcome negative cash flow problems, one obvious option is to increase profits. But that is easier said than done. Because of this, companies typically focus on the other side of the equation – reducing expenses.
Reducing expenses by cutting costs may seem like a simple solution, but the implications can be numerous. Let’s dig deeper into how businesses can reduce their outflows and explore how effective cash management can help create cash flow.
It’s a trim, not a shave
Cost reductions can sometimes be confused with their complete elimination. “Reduce costs” is perhaps a better term, and it has many potential options. Here are a few.
Consumables and equipment for production, land for buildings, inventory for sale. Many companies choose to purchase these items. But for cash flow purposes, leasing can provide a positive boost as it results in smaller, scheduled payments, leaving cash available for more immediate business needs. In addition, leasing rates can be deducted from tax as business expenses.
Certain recurring expenses are the cost of doing business and are accounted for as liabilities. This includes things needed to operate, such as rent, supplies, and payroll. Others, like subscription services that continue past their intended use, can be overlooked when managing cash flow.
That’s why it’s so important to have an effective verification process in place, such as preparing a balance sheet. This process can help eliminate these outliers and create positive cash flow.
Strategic sourcing is less about reducing costs and more about planning their impact to coincide with the time a company has more cash on hand. This can take a simple form such as B. Negotiating end-of-month payments with vendors. Or the timing can be complex, like an incremental pay plan that revolves around the company’s revenue stream. Both methods can contribute to better cash management.
To save money, business owners can be creative when shopping. Buying in bulk is an option as suppliers usually offer discounted prices for larger purchases. Some companies with similar utility needs choose to set up a cooperative to pool their purchasing power.
Plug the holes, stay afloat
Maintaining cash flow is important for any business. Look at your own business to see how you might find sustainable, positive cash flow:
- Rent instead of buy
- Review expenses for outdated or unnecessary costs
- Find ways to expand or increase purchasing power
Many cost factors are unique to each industry and each individual business, but one thing stays the same: create positive cash flow by reducing expenses. Contact a Chase commercial banker to discuss how you can improve cash flow for your business.
For Information/Educational Purposes Only: The views expressed in this article may differ from those of other JPMorgan Chase & Co. employees and departments. The views and strategies described may not be appropriate for everyone and are not intended as specific advice/recommendations for any individual. The information has been obtained from sources believed to be reliable, but JPMorgan Chase & Co. or its affiliates and/or subsidiaries do not guarantee its completeness or accuracy. You should carefully consider your needs and goals before making any decisions and consult the appropriate professionals. Outlook and past performance are not guarantees of future results.
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