How to improve your cash flow without financing

What is cash flow? 

Cash flow is the difference between income and costs in your business account. You look at this difference every quarter, month, week, or day. It depends on what type of business you have and how often money is coming in and going out. 

Calculating the balance between income and costs 

This is how you calculate your cash flow: deduct the costs from your income in your business account for a period of one day, week, month, or quarter. 

Suppose you earn €30,000 in revenue during one quarter and spend €20,000 on buying goods, expenses, and withdrawals for personal use. In this case, your cash flow is €30,000 - €20,000 = €10,000 and positive. 

If you earn €20,000 during one quarter and spend €30,000, your cashflow is €10,000 negative. You can fill the gap, for example, by getting an overdraft on your current account. 

Managing cash flows 

How do you manage your cash flows? Some ways in which you can manage your cash flows:  

• planning and monitoring,  

• accounts receivable management,  

• accounts payable management,  

• stock management,  

• tax reduction,  

• increasing profit margins, and 

• leasing/using, rather than owning, business assets. 

Planning and monitoring 

A liquidity budget will help you predict the income and expenditures of your business. The estimate will show you when you have a lack of funds. You can reduce the deficit by shifting around some of your income and expenditures. Use the Future Check to keep track of your cash flows. This Check will allow you to keep track of your financial status and what the outlook is for the next 12 months. 

Everyday checks 

If you check your income and expenditures on a daily basis, you will always know when customers will pay. Online accounting software offers the convenience of a dashboard and up-to-date access. 

Accounts receivable management 

Smart accounts receivable management enables you to ensure that your customers or clients will pay your bills as soon as possible. You agree with them on a clear payment term: for example, 14 days (as stated in your price quote/proposal), and on general terms and conditions. You can also request that your customer or client prepay a portion of the amount owed. 

Send part invoices (also known as percentage invoices), also immediately on delivery and for long-term projects. If necessary, you can increase the billing frequency from once a month to fortnightly (biweekly) or weekly. You should facilitate payment by offering online payment options such as digital payment requests, iDEAL, or e-billing. A discount of several percentage points allows you to encourage your customers or clients to pay after seven days rather than 14 days. 

Accounts payable management 

Accounts payable management involves paying invoices to your suppliers in time, but not too early. Make a payment plan where you do not pay all your invoices at the same time. You should preferably pay before the due date. 

Use a list of priorities, in which you specify your main costs/financial commitments, including wages, taxes, rent, and your main suppliers/vendors (listed in order of priority). Use this when drafting your plan. You can agree with some suppliers/vendors to send you part invoices. This makes it possible to spread your payments, making it easier to pay even larger amounts more easily. 

Stock management 

You keep money in stock which is not immediately available for business operations; you can reduce this amount by optimising your stocks and through smart buying. This is how you can release funds. ‘Smart buying’ might involve products in consignment, where you agree to pay only after the product is sold. 

Ensure a minimum stock of products you need all the time, and make sure you are always up-to-date on your stock. You will then only need to order items which are essential. If your customer or client accepts a longer delivery time, you do not have to keep everything in stock. You can take this one step further by outsourcing your stock. If suppliers supply directly to customers in a flexible manner, you can reduce your stock, which saves you both warehouse space and insurance costs. Also, always remember that cash is king. If you regularly sell off obsolete or redundant business assets such as inventory at a lower price, you can free up funds. 

Finally, meet with suppliers from time to time to discuss purchase prices and find out whether participation in a buying group or buying organisation delivers economies of scale. 

Reducing your taxes 

You can use your deductibles annually when filing your income tax or corporate tax return. If you are expecting a lower profit, you can ask the tax authorities to reduce (in Dutch) your provisional income tax assessment or corporate tax statement.  

Accelerate your deduction term through voluntary write-offs. In this case, you deduct an amount in depreciation from an investment (for example, a calendar year earlier than planned) and start paying less tax that same year. Throughout the year, you can claim back VAT on unpaid invoices (Belastingdienst, in Dutch) and VAT from other EU countries. 

Improving your profit margins 

You can calculate your revenue by multiplying your sales price by the number of products or services you sell. If you aim to increase your revenue and, by extension, your profit margin on your products or services, you must either increase the price or the number of products. 

Increasing price 

If you charge an hourly rate, you can raise this rate every six months if the market situation allows this. For example, once you have acquired more experience, have undergone additional training, if you intend to build a buffer, or if your costs increase. Inform your customers or clients of the increase in time. 

When selling products, you should focus on products with higher profit margins. Alternatively, you can also add value by providing additional services. This enables you to command a higher price. If your costs increase, for example due to special circumstances such as COVID-19 restrictions, this also warrants a price increase. 

Innovation and collaboration 

Increase your client or customer base and/or generate more orders or projects with a new way of selling and marketing. It may be time to open a new online shop or generate additional online sales through Google Shopping or Instagram Shopping. Alternatively, you could explore options such as influencer marketing, guerrilla marketing, or affiliate marketing. And if you are working together with other businesses serving the same market with different products or services, you will find you can complement each other. 

Usage versus ownership 

If you buy and lease items such as machinery and equipment, this will free up the funds invested in the business asset. You can also choose business trading and use sharing platforms (Deeleconomie in Nederland, in Dutch) if you need something temporarily. 

Still need funding? 

If you are still considering taking out a loan, have a look at your lender’s criteria before submitting an application. If you find that your score for a particular criterion is sub-par, adjust your operations or explore alternatives in advance. 

Help with financing 

Enlisting help will increase your odds of success, and with the right advisor and a good financial rationale, you will get your finance application approved in no time. These advisers will help you get started. 

If you would like to discuss your financial situation with an expert, feel free to contact the KVK Financing Desk.