Cash Flow: What is it, How does it work and Why is Direct Debit the way forward?

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Good cash flow is a business necessity.

It really is that simple – according to one recent study, 82% of small businesses fail due to poor cash flow management. That’s almost double the amount of SMEs who close due to high competition or having the wrong team in place.

But what exactly do we mean by “cash flow?” How can these two little words pose business challenges? And how can managers and owners effectively manage their company’s cash inflows and cash outflows?

Read below as we answer these questions and outline why automating your payments with Direct Debit is the key to securing your cash flow.

What is cash flow?

Set Up Expectations

Cash flow is defined as the movement of money in and money out of a business in terms of income and expenditure.

Positive cash flow occurs when a company has more money coming in than out. This is the ideal position as you will be able to meet all of your financial obligations (such as paying salaries, settling bills and repaying loans) and invest for future growth.

Conversely, negative cash flow is where no business wants to be. More outflows than inflows mean that additional borrowing may be required, you could find it harder to secure finance, you pay your suppliers, staff and creditors late (or not at all). This is the short road to a damaged brand reputation and business failure.

Why it’s not profit

It can be tempting to conflate cash flow with profit. But when it comes to a company’s financial health simply subtracting the cost of sales from revenue generated is not an accurate gauge. Gross profit fails to take into account business overheads such as those all important salaries or any loan repayments that you are committed to.

You need to look to your cash flow statement to know the true lay of the land – it is your cash reality. In some circumstances, a company could be in profit but actually have negative cash flow.

How is a cash flow statement made up?

A cash flow statement sets out how much cash and cash equivalents are moving in and out of the business. The use of “cash equivalents” is important here – cash flow statements contain three major sections:

Core operations – cash from core business operations i.e. your net income with adjustments made for increases or decreases in assets, liabilities and expenses.
Investing – money spent on new assets (machinery, technology or even acquiring another company) and money received from the sale of assets or interest income.
Financing – cash injection from new borrowing or the issue of new shares with cash decreases noted for the repayment of any long term debt, liabilities or dividends to shareholders.

Accurate cash flow analysis can help you to predict future trends and budget appropriately. Many businesses are cyclical or affected by seasonal trade driving home the need for good cash management to last the long-term.

Managing cash flow with Direct Debit

Managing Cash Flow
How can Direct Debit help improve cash flow? If you’re not already using this automated payment method to collect fees, subscriptions, recurring invoices and more then you are missing out.

As one of the safest and most reliable payment collection methods, Direct Debit puts you – the business, not the customer – in control of when you are paid and how much. No more chasing cheques in the post, waiting for customers to pay over the phone or initiate payment via Standing Order; Direct Debit does it automatically. Hello, predictable income. Hello, cash flow positive.

Choose a Direct Debit service provider such as FastPay to collect on your behalf and you can enjoy hassle free collections as your payments are taken care of – on time, every time. With your financial processes streamlined, you can get back to what you do best – growing your business.

How FastPay can help

FastPay is an established Bacs-approved Bureau and Bacs affiliate that enables businesses of all sizes to harness the power of Direct Debit. Whether you require our Direct Debit Bureau service or Managed service, we make it easy to get started on the path to streamlining your cash flow and financial operations. Our powerful integrations and API integrate seamlessly with existing systems and software such as Xero or Sage meaning that you could be set up and collecting within 24 hours.

Find your Direct Debit solution by calling FastPay on 0161 737 5290.

Alternatively, you can request more information on our services by submitting your contact details online.
Lastly, discover why FastPay is the first choice for clients including the NHS and high street banks by viewing our happy client testimonials.

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