How To Generate & Maintain A Positive Cashflow

Generating and maintaining a positive cash flow is essential not only in the overall success of a business, but also in its ability to function on a day-to-day basis. The cash flow of a business is usually a good indication of its overall health, so it is important that you as a business owner are reviewing it regularly. This will enable you to identify any unnecessary drains on your resources, as well as to spot any potential opportunities. For these reasons, we have compiled a comprehensive list of ways you can generate and maintain a positive cash flow.

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So, What is cash flow?

Before we discuss how to properly manage your cash flow, we need to be clear about exactly what it is. The term “cash flow” refers to all money that is moving both in and out of your business each month.

Therefore, cash flow is a broad term that encompasses all money coming into your business from the sale of products or services, as well as all money going out in the form of expenses, including everything from rent, stock purchases, wages, insurance, utility bills, and so on.

If your business is bringing in more money than it is sending out, it is said to have a “positive cash flow”. If it is losing more money than it is gaining, it has a “negative cash flow”.

It is worth noting that while cash flow refers to the balance of all incoming and outgoing cash, it is best thought of as medium to long-term trends.

For example, if you purchase an expensive new piece of equipment, you may spend more than you bring in on that day.

While this is technically a negative cash flow for that day, it is not particularly useful to view it as such, as it is a one-off investment that will hopefully increase your takings going forward.

It should also be noted that the value of the equipment you purchase may increase the net value of your business, but will not improve your cash flow, as it is a non-liquid asset i.e. one that cannot be quickly exchanged for money. 

Monitor Your Finances

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We have all heard the saying “Look after the pennies, and the pounds will look after themselves”, and there is quite a lot of truth to this.

When it comes to the business world, we are far more likely to hear people talk about the importance of the bottom line.

But don’t forget about where the term “bottom line” comes from: it is the end result of all your financial dealings, the final answer to every single sum your business has had to calculate.

Although the bottom line may be the most important number in your business, it depends entirely on everything that has come before it, so improving it is a matter of improving what comes before it. It is the pounds, and you need to remember to look after the pennies.

The Best Businesses Keep tabs on everything

As a result, the best business owner in the world will know exactly where every penny in their business is coming from, where it is going to, and why.

This of course means keeping track of absolutely all financial aspects of your business, and the most effective way to do this is in real-time.

These days, there are literally countless real-time financial tracking products and services to help businesses keep tabs on their income and expenses.

Using software to keep on top

There is a range of software available that each offer a variety of functions, such as personalised payment portals, automated invoices and reminders, wage calculators, and analytics, to name a few.

This can be extremely useful in helping you to examine your financial state in microscopic detail, but the majority of these are subscription-based products, so using them will naturally add to your monthly expenses, thereby negatively impacting your cash flow.

This may be a worthwhile investment for large, healthy, or established businesses, but for small or new businesses, it may be a luxury rather than a necessity.

Using Spreadsheets to keep on top

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While it may take more time and effort, many of the most important points of real-time financial monitoring can be achieved by using a simple spreadsheet, such as those available through Excel or Google Sheets.

This means that every single time money moves in or out of your business, it should be entered into the spreadsheet.

These spreadsheets can be used to keep track of your finances from a number of different perspectives. Before continuing, let’s just remind ourselves of some of the key words involved in spreadsheets:

  • Cell: An individual rectangle in which you can type text.

  • Spreadsheet: A collection of cells, labelled alphabetically from left to right, and numerically from top to bottom.

  • Row: A horizontal line of cells, which by default are referred to by a number.

  • Column: A vertical line of cells, which by default are referred to by a letter or combination of letters (once you exceed 26 columns, they are named in the format AA, AB, AC, etc).

Columns and rows can be renamed to help you present everything in a clear and consistent fashion. To use a simple example, your columns could be named after the months of the year, and your rows named after your clients.

So if  the cell at the intersection of Column A and Row 1, you could have “January” and “Murphy & Sons”. When they place their January order, you issue your invoice, after which you enter the amount due.

By right clicking the cells and selecting the paint can, you can colour each one: blue for unpaid, red for overdue, and green for paid. Faithfully executing such a technique enables you to glance at your spreadsheet and immediately know who owes you how much.


The FAST Approach

The best way to implement real-time financial monitoring is by using the FAST standard. The FAST standard is a set of guidelines laid out by industry experts to help people create a clear and consistent model for financial monitoring.

The latest publication from the FAST Standard Organisation describes its purpose as follows:

The Signatories to the FAST Standard believe financial models must be as simple as possible, but no simpler. Any model that is unnecessarily complicated is not good. Without simplicity supported by rigorous structure a financial model will be poorly suited to its sole purpose – supporting informed business decisions
— FAST

FAST is an acronym for Flexible, Appropriate, Structured, and Transparent, and it has been designed specifically with spreadsheets in mind. Below is an explanation of each of these four pillars.

Flexible:

The financial model and techniques used need to be adaptable, allowing you to easily input or remove information, and to examine the impact of hypothetical scenarios with ease and reasonable reliability. For example, if you were negotiating a major deal, you could easily input the value of that deal and calculate how it would affect your bottom line. Alternatively, you could remove an existing client, and examine what the potential impact of that would be on your business.

Appropriate:

In order for a model to be flexible, it needs to comprise of only the most appropriate information. If your spreadsheet is loaded with a lot of trivial information and insignificant details, you not only make it more difficult to quickly alter the information, but you also begin to drown out the most important figures.

It is also important that the information included in your model is of the same quality. This means that two pieces of information that are presented side-by-side should have roughly the same level of reliability.

For example, while it may be useful for you to estimate how much you expect a certain employee to sell in a month based on previous months, this should not be put next to something like tax rates.

The rate of tax you are expected to pay is a cold, hard fact, and is not going to suddenly change overnight without warning. Your employee, on the other hand, could quit, or underperform. By presenting projections next to facts, you give the impression that the projections are more reliable than they really are.

Structured:

Financial modelling is always an ongoing process, and there will be many times that you need to need to draw up comparisons, such as this month versus last month, or today versus this time last year, for example.

Therefore, it is extremely important for you to strictly adhere to one model. A restaurant owner who lumps all drinks products under the banner of beverages should not suddenly split this into alcoholic and non-alcoholic beverages, as they will have no historical data on this split to accurately analyse trends.

Decisions on how information is best presented need to be made at the beginning, or it will complicate things further down the line. It is also more difficult and confusing to compare different spreadsheets if each one lays out the same information in different ways.

Transparent:

Almost anyone should be able to look at your spreadsheet and understand what is going on. Information that is obscure or vague is not helpful in understanding how a business is functioning. If you simply provide the total amount earned without giving any indication of where that money came from or what brought it in, it is much more difficult to understand what is or is not working in the business.

When properly applied, real-time monitoring can be an invaluable asset to a business, allowing you to identify negative trends, such as loss-making orders or slow-moving stock. You can then make an informed decision on how to rectify the situation, such as by altering your prices, or eliminating a product or service altogether.

Payment Terms / Policy

In order to give yourself the best chances of being paid in full and on time, you need to provide your customers with clear payment terms / payment policy. This should clearly set out the date by which payment is expected to be made, as well as any incentives for early payment and disincentives for late payments.

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Offering discounts on early payments is a good way to ensure that your inward cash flow is moving as quickly as possible, although you will need to consider the financial hit you will take by offering such a deal.

Charging a late payment fee, on the other hand, can not only help prevent late payments, but also provide you with some additional income at no extra cost to you.

Keeping Clear Documentation Is A Must

Keeping clear documentation and as much of a paper trail as possible is extremely helpful in resolving any disputes that may arise. Invoices should always be issued as soon as possible after an order is placed.

Requesting that the customer confirm that they have received the invoice, and that they flag any issues immediately can help prevent disputes further down the line.

Knowing exactly who to send it to can help speed up the payment process, as can sending reminder emails a few days before payment is due, on the day itself, and, if necessary, a few days after. Employing these techniques allows you to be firm, but fair, when following up on late payments.

Your Cash Flow Calendar

Depending on your line of work, you may have a large volume of recurring orders. And no matter what your line of work is, there will always be certain expenses that need to be paid at a certain time, such a rent/mortgage, utilities, and wages.

It is worth taking some time to compare your the dates on which cash is expected to flow in with the dates it is expected to flow out, and try to arrange these in such a way as to ensure you are not hit with a giant wave of income or expenses once or twice a month.

A consistent, low-level flow of cash offers more flexibility should it be needed, and arranging these dates properly early on can avoid a situation where you are hit with an unexpected expense, but have no guarantee of cash coming in for weeks.

And of course, it is always advisable that you set aside a certain proportion of your income to build up some cash reserves, as sudden and unexpected expenses are all but guaranteed to arise at some point, and failure to prepare for perfectly predictable scenarios such as this is a recipe for disaster.

Properly Consider Your Deals & Offers

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Offering a discount on early payments can be an effective way to get the money you are owed as soon as possible.

But of course, the discount on offer needs to be smaller than the profit margin on that order, and even then you need to consider the real impact of such an offer, particularly if the order is likely to be a recurring one. Ill-conceived deals can be absolutely detrimental to a business.

McDonald’s marketing howler

Possibly the best way to underscore this point is by looking at how McDonald’s handled the 1984 Los Angeles Olympic Games.

Often referred to as the biggest disaster in the history of marketing, McDonald’s had hoped to cash-in on some of the pro-American sentiment during the games, and offered a card with an event on it with every purchase.

If the U.S. won a medal in that event, the customer would receive either a free Big Mac (Gold), fries (silver), or a drink (bronze). What McDonald’s didn’t consider was a potential boycott from the Soviet Union, who claimed their athletes would not be safe in America.

That year, the U.S. won 174 medals, 100 more than they would win in the following 1988 Summer Games.  6,600 outlets across the nation we inundated with customers looking for their reward, and quickly ran out of food.

If a company as big and powerful as McDonald’s can make such a catastrophic error, despite having access to an endless line of lawyers, marketers, and business geniuses, a small business could easily fall into a similar dilemma.

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Promotions such as the use of loyalty cards can be extremely useful in getting customers back in the door, which is an incredibly powerful thing to do as it is 15 times easier to sell to an existing customer than it is to sell to a new one.

Once again, you need to do your calculations and ensure that the item a customer gets in return for their loyalty does not wipe out the profits that came before, and furthermore, you need to ensure that your system is safe e.g. use a personalised stamp rather than a generic X, so customers cannot cheat the system.

Not only is it considerably easier to sell to an existing customer, it is also much easier to sell more to a customer once they have decided to to make a purchase at all.

Back End Products: You Might Also Like

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With this in mind, a good business owner will always look at promoting back-end products or services.

You will no doubt be familiar with this practice online, where retailers will show you items also bought by other customers, or food delivery companies offering suggesting side-dishes or drinks to go with your meal.

Providing back-end products not only means you will be selling more overall, but the products themselves can often have a much higher profit margin than the original purchase.

Someone who has just purchased an expensive pair of glasses is highly likely to consider buying a stronger case to protect them, or a cleaning/repair kit, for example.

While these items won’t bring in the bulk of your cash, they will add up over time and make a noticeable improvement to your cash flow.

Business Credit Cards, and Other lines of credit

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While it is advisable not to become overly reliant on or frivolous with credit, setting yourself up with a business credit card and using it appropriately can be very helpful both in emergencies and in the long-run.

Even if you have cash in the bank, paying your expenses with credit, and then paying that credit off early can improve your credit score by establishing a history of reliability.

You can take this a step further by ensuring that you stick to a low credit utilisation ratio, meaning you only use a fraction of what your limit actually is.

This reinforces the point that you are a responsible spender and a trustworthy customer for the bank, which will make it easier to increase your limit in the future.

Building a good credit rating

When that happens, it becomes even easier to decrease your credit utilisation ratio, and improve your credit rating even more.

Beginning this process when you don’t particularly need to makes it a lot easier to achieve a good credit rating than suddenly signing up for a card when you need it, and hitting your maximum limit the first time you use it.

And of course, all of this gives you a little more breathing room and can prevent any issues with outgoing cash, late payment fees, and fundamental overheads such as wages or utilities.

As a business owner, generating and maintaining a positive cash flow should always be at the forefront of your mind.

Achieving this requires a multifaceted approach that takes into account all aspects of your business.

No expense should ever be free from scrutiny, and you should constantly be looking for ways to decrease your costs.

Whether it is reducing your electricity bill by switching to LED bulbs, or dropping a product you love personally because it just isn’t selling fast enough, there are always ways to reduce your cash outflow.

Similarly, there will always be new opportunities for you to improve your cash inflow, be it by bringing on a new product, running a well-calculated promotion, or simply staying on top of your invoicing.


Arguably, the most important element of cash flow management is the point we discussed first: making sure it is properly monitored. Without this, money will fall through the cracks, things won’t be run as efficiently as they could be, and you will be unable to identify trends and make well-informed business decisions. Ultimately, the buck stops with you, and it is your responsibility to know exactly where those bucks are flowing.