Cash flow is a very simple equation. It reflects the ratio of a business’ cash inflow or receipt to its outflow or expenditure. You may have heard these referred to as accounts receivable and accounts payable.
Let’s keep it simple.
If your business makes more money than it spends, it has positive cash flow. If the opposite is true, then your business has negative cash flow. Neither status is permanent, and cash flow can fluctuate throughout the year due to factors such as your industry, sales cycle, supply chain, and one-time expenses.
Creating cash flow is not so much an active business decision as it is something that happens naturally 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. That’s why businesses tend to focus on the other side of the equation – reducing expenses.
Reducing spending by cutting costs may seem like the easy solution, but the implications can be many. Let’s dig a little deeper into how businesses can reduce outflows and examine how effective cash management can help generate cash flow.
It’s trimming, not shaving
Cutting costs is sometimes confused with eliminating costs altogether. “Cost reduction” might be a better wording, it has a lot of potential options. Here are some.
lease
Supplies and equipment for production, land for buildings, inventory for sale. Many businesses choose to purchase these items. But in terms of cash flow, leasing can provide a positive boost as it reduces recurring payments, freeing up cash for more pressing business needs. Plus, lease payments can be written off as a business expense for your taxes.
audit fee
Certain recurring charges are a cost of doing business and are listed as accounts payable. They include things needed to operate such as rent, supplies and payroll. Other services, such as subscription services that continue past expected use, may be missed when managing cash flow.
This is why it is so important to maintain an effective review process, such as drafting a balance sheet. This process can help eliminate these outliers and help generate positive cash flow.
plan purchase
Strategic purchases are not so much about reducing costs as about timing their impact when businesses have more cash on hand. This can take the simple form of negotiating end-of-month payments with suppliers, for example. Or the timing can be complex, like incremental compensation plans around a business’ revenue stream. Either approach may help improve cash management.
To save money, business owners can get creative with their purchases. Buying in bulk is an option, as suppliers often offer discounted prices for bulk purchases. Some businesses with similar supply needs choose to form cooperatives to pool their purchasing power.
plug the hole and stay afloat
Maintaining cash flow is important for any business. Take a look at your own business and see how you can find sustainable positive cash flow:
- lease instead of buy
- Review outdated or unnecessary fees
- Find ways to expand or increase your purchasing power
Many cost factors are unique to each industry and individual business, but it remains the same: create positive cash flow by reducing expenses. Contact a Chase Commercial Banker to discuss how to improve your business’ cash flow.
For informational/educational purposes only: The views expressed in this article may differ from those of other J.P. Morgan employees and divisions. The views and strategies described may not be suitable for everyone and are not intended as specific advice/recommendations to any individual. Information has been 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 goals before making any decision and consulting the appropriate professional. Outlook and past performance are no guarantee of future results.
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