It’s true: the world of business is filled with confusing terms whose meanings sometimes overlap. However, as a business owner or investor, it’s important to understand the difference between terms like cash flow and income. In today’s post, we tell you everything you need to know.
What is Cash Flow?
Cash flow refers to the amount of money that is coming in and going out of a business during a specific period of time.
Cash goes into a business as a result of selling products or services or thanks to interest income. On the other hand, cash flowing out of a business includes money used for things like day-to-day expenses, investments, and debt repayment.
Cash flow is a measure of your business’s liquidity, or to put it another way, your ability to meet short-term financial obligations.
Cash Flow vs Income
While cash flow is an important component of your business’s financials, it’s not the same as income.
Income refers to the money a business earns from the sale of its products or services, minus any expenses incurred in generating that revenue.
In short, cash flow is the movement of cash in and out of a business, while income is the profit earned from that business’s operations.
It’s important to note that while income is often used as a measure of the financial success of a business, cash flow can be a more accurate indicator. The reason is that a business can have high income but poor cash flow (this can happen, if for example, may slow-paying clients create a cash flow bottleneck), which can lead to financial problems down the line.
How to Improve Your Business’s Cash Flow
For businesses, cash flow is crucial for a number of reasons. Positive cash flow allows a business to reinvest in growth, pay off debt, and deal with unexpected financial challenges. It also gives business owners peace of mind and a sense of control over their finances.
But how to improve the cash flow of your business? Here are some easy strategies any business owner can implement:
- Review your pricing strategy: Make sure you’re charging enough to cover your costs and generate a profit.
- Invoice promptly and follow up: Send out invoices quickly and follow up promptly to ensure timely payments from customers.
- Use receivables factoring. Factoring of accounts receivable is a great way to deal with gaps in your cash flow. Factoring your receivables means selling them to a third-party company known as factor. The factor pays you upfront and then collects the invoices from your customers in exchange for a small fee. This way you don’t have to wait 30 to 90 days to get paid, strengthening your cash flow and allowing you to make payments or to seize business opportunities.
- Negotiate better payment terms: Negotiate with vendors and suppliers for better payment terms or discounts for early payment.
- Reduce expenses: Review your expenses and look for areas where you can cut costs without sacrificing quality.
To learn more about receivables factoring, read our previous posts, “Invoice Factoring vs Line of Credit: Which Is Better for Your Business?” and “Invoice Factoring for Working Capital: Is It a Good Idea?”
ACS Factors: We Turn Your Invoices Into Cash
We are a Factoring company located in Upland, California, with many clients nationwide in the distribution and logistics corridor which includes Ontario, Riverside, Fontana, Jurupa Valley, and Moreno Valley.