Cash flow is an easy enough equation. It’s a reflection of a business’s inflow or cash received versus its outflow or money spent. You may have heard these referred to as accounts receivable and accounts payable.
Let’s keep things simple.
If your business makes more money than it spends, it has a positive cash flow . If the opposite is true, then your business has a negative cash flow. Neither state is permanent, and cash flow can fluctuate throughout the year because of factors such as your industry, sales cycle, supply chain and one-off expenses.
Creating cash flow is less 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’s easier said than done. Which is why businesses tend to focus on the other side of the equation — reducing expenses.
Reducing expenses by cutting costs may seem like the simple solution, but the implications can be numerous. Let’s dive deeper into how businesses can reduce their outflow and examine how effective cash management can help create cash flow.
It’s a trim, not a shave
Cutting costs can sometimes be confused with eliminating them entirely. “Reducing costs” may be a better way to phrase it, and it comes with a lot of potential options. Here are a few.
Supplies and equipment for production, land for buildings, inventory for sales. Many businesses opt to purchase these items. But for cash flow purposes, leasing can provide a positive boost because it results in smaller, scheduled payments, leaving cash for more immediate business needs. Plus, 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 that are needed to operate, like rent, supplies and payroll. Others, like subscription services that continue after their intended use, may be missed when managing cash flow.
That’s why it’s so important to keep an effective review process, such as drafting a balance sheet. This process can help eliminate these outliers and help create positive cash flow.
Strategic purchasing is less about reducing costs and more about timing their impact to coincide with when a 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, as with an incremental pay schedule revolving around the business’s revenue stream. Either method may help contribute to better cash management.
To save money, business owners can be creative with purchases. Buying in bulk is one option, since suppliers tend to offer discounted rates for larger purchases. Some businesses with similar supply needs choose to form a cooperative to pool their buying power.
Plug the holes, stay afloat
Maintaining cash flow is important for any business. Look at your own business to see how you could find a sustainable, positive cash flow:
- Lease instead of buy
- Review expenses for outdated or unnecessary costs
- Find ways to extend or increase purchasing power
Many cost factors are unique to each industry and individual business, but this remains the same: Create positive cash flow by reducing expenses. Connect with a Chase business banker to discuss how you can improve the cash flow for your business.
For informational/educational purposes only: The views expressed in this article may differ from those of other employees and departments of JPMorgan Chase & Co. Views and strategies described may not be appropriate for everyone and are not intended as specific advice/recommendation for 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 objectives before making any decisions and consult the appropriate professional(s). Outlooks and past performance are not guarantees of future results.
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