Cash flow is an easy enough comparison. It is a reflection of a business’s inflow or cash received versus its outflow or money spent. You may have heard it 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 statement 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 less of an active business decision and more of 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. This 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 outflows and explore 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. “Cost reduction” might be a better way to phrase it, and it comes with many potential options. Here are a few.
Supplies and equipment for production, land for buildings, inventory for sales. Many businesses choose to purchase these items. But for cash flow purposes, leasing can provide a positive boost because it leads to smaller, scheduled payments, leaving cash for more immediate business needs. Plus, rent payments can be written off as a business expense on your taxes.
Review of expenses
Certain recurring expenses are the cost of doing business and are included as accounts payable. This includes things necessary to operate, such as rent, supplies, and payroll. Others, such as subscription services that continue beyond their intended use, may be missed when managing cash flow.
That’s why it’s so important to have an efficient review process, like preparing a balance sheet. This process can help eliminate these outliers and help create positive cash flow.
Strategic purchases are 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, such as with an incremental payment schedule that revolves around the business’s revenue stream. Either method can contribute to better cash management.
To save money, business owners can be creative with purchases. Buying in bulk is one option, as suppliers tend to offer discounted rates for larger purchases. Some businesses with similar supply needs choose to form a cooperative to pool their purchasing power.
Plug the holes, stay above water
Maintaining cash flow is important for any business. 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
- Find ways to expand or increase 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. Connect with a Chase business banker to discuss how you can improve 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 suitable 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 guarantee its completeness or accuracy. You should carefully consider your needs and goals before making any decisions and consult the appropriate professional(s). Prospects and past performance are not guarantees of future results.
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