How do you increase cash flow from operating activities to revenue?

Cash Flow from Operating Activities?

Cash Flow from Operating Activities represents the total amount of cash generated from operating activities throughout a specified period.

Table of Contents

• Cash Flow from Operating Activities Formula
• Cash from Operations: Non-Cash Expense Adjustments (D&A)
• Cash Flow Impact: Changes in Net Working Capital (NWC)
• Net Working Capital (NWC): Current Assets
• Net Working Capital (NWC): Current Liabilities
• Cash Flow from Operating Activities Limitations

Cash Flow from Operating Activities Formula

The “Cash Flow from Operations” is the first section of the cash flow statement, with net income from the income statement flowing in as the first line item.

Starting from net income, non-cash expenses like depreciation and amortization (D&A) are added back and then changes in net working capital (NWC) are accounted for.

Cash Flow from Operations = Net Income + Non-Cash Expenses +/– Changes in Working Capital

Cash from Operations: Non-Cash Expense Adjustments (D&A)

Non-cash add-backs increase cash flow as they are not actual outflows of cash, but rather accounting conventions.

For instance, depreciation is the allocation of capital expenditures (CapEx) across the purchased asset’s useful life assumption, which is done to abide by the matching principle (i.e. expenses are matched with corresponding benefits).

Typically, D&A is embedded within COGS/OpEx on the income statement, which reduces taxable income and thus net income.

Since net income represents the profits under accrual accounting, the CFS adjusts the net income value to assess the true cash impact — starting by adding back non-cash charges.

Cash Flow Impact: Changes in Net Working Capital (NWC)

Under accrual accounting, revenue is recognized when the product/service is delivered (i.e. “earned”), as opposed to when cash is received.

In effect, this leads to the creation of line items such as accounts receivable which is counted as revenue recognized on the income statement, but whose cash payment has not actually been received yet.

• Accounts Receivable (A/R)

• Accounts Payable (A/P)

• Inventory

• Accrued Expenses

• Prepaid Expenses

• Deferred Revenue

• Other Current Assets

• Other Current Liabilities

Moreover, the cash impact for changes in working capital are as follows:

Net Working Capital (NWC): Current Assets

• Increase in NWC Asset → Decrease in Cash
• Decrease in NWC Asset → Increase in Cash

Net Working Capital (NWC): Current Liabilities

• Increase in NWC Liability → Increase in Cash
• Decrease in NWC Liability → Decrease in Cash

If accounts receivable (A/R) were to increase, purchases made on credit have increased and the amount owed to the company sits on the balance sheet as A/R until the customer pays in cash.

Once the customer fulfills their end of the agreement (i.e. cash payment), A/R declines and the cash impact is positive.

Another current asset would be inventory, where an increase in inventory represents a cash reduction (i.e. a purchase of inventory).

On the other hand, if accounts payable (A/P) were to increase, the company owes more payments to suppliers/vendors but has not yet sent the cash (i.e. the cash is still in the company’s possession in the meantime).

Once the company pays the suppliers/vendors for the products or services already received, A/P declines and the cash impact is negative as the payment is an outflow.

With that said, an increase in NWC is an outflow of cash (i.e. ”use”), whereas a decrease in NWC is an inflow of cash (i.e. “source”).

Cash Flow from Operating Activities Limitations

Net income would be equivalent to CFO if net income were just comprised of cash revenue and cash expenses.

Cash flow from operations adjusts net income, which is an accounting measure susceptible to discretionary management decisions.

The major drawback is that capital expenditures (CapEx) — typically the most significant cash outflow for companies — are not accounted for in CFO.

Therefore, cash flow from operations is more objective and less prone to accounting manipulation in comparison to net income, yet is still a flawed measure of free cash flow (FCF) and profitability.

As a business owner, you run the risk of bankruptcy if you’re not on top of cash flow management. A full 82 percent of business failures are caused by poor cash management, according to a US Bank study.

So, is it easy enough to bring in more money than your business is spending? Although it sounds simple in theory, having a positive cash flow encompasses much more than profitability. Even if your company is currently profitable, it is still at risk for negative cash flow. One common example of this is if you have obligations for future payments that you cannot meet because you’ve mistimed incoming funds.

By maximizing your company’s cash flow, you can help your company receive profits faster, meet targets in a shorter time frame, and lower your operating expenses. Wondering how to improve cash flow in your small business? These 10 tips can help you improve cash flow for your company.

1. Anticipate and Plan for Future Cash Needs

Keeping accurate, timely, and relevant (ART) accounting records allows you to build a forecast for your business based on historical results. At the very least, businesses should be reviewing their cash flow monthly.

Being proactive with your cash flow enables you to forecast your anticipated funds and help prepare for historically painful periods or seasonal trends.

For example, if you find that you are anticipating a future need for extra cash, you may want to start talking to lenders about a bridge loan to help pave the way for future financing. Similarly, if you can anticipate large expenses ahead of payout, you’ll be able to plan your other obligations accordingly to avoid cash flow surprises.

2. Improve your Accounts Receivable

By actively managing your accounts receivable, you can stay on top of outstanding invoices and decrease the time it takes to get paid.

One way you can do this is by encouraging customers to pay early. For example, if your payment terms are net 30 days, consider offering a slight discount for customers paying net 10 days.

Are you currently waiting for checks to arrive? Offering a variety of payment options will make it as easy as possible for a customer to pay you, such as ACH or credit card payments. While these options may come with processing fees, getting money faster is better for your business if cash flow is tight and eliminates time & labor spent on collection. These options can help prevent you from stacking up credit card debt to cover expenses.

3. Manage your Accounts Payable Process

Establishing and organizing your accounts payable process will be essential to improving your company’s cash flow. If your accounting department doesn’t already use software to help manage your accounts, it is a good idea to invest in one. Next, you should communicate with your team which invoices are most important so they can be paid first. Remember, do not let unpaid invoices slip through the cracks.

Another tip? Try to get to know your vendors and extend payment terms as long as possible. Most vendors will ask businesses for net 30, but once you build up a positive relationship, they may be more inclined to offer net 45 or net 60. After all, the longer you have to pay, the more time you have to get money in. You can use a simple payment agreement template to help you when creating your financial contracts.

4. Put Idle Cash to Work 

Another way to improve business cash flow is by putting idle cash to work. Your idle cash is money that is not earning any income.

Chances are if you have large balances sitting in non-interest-bearing accounts, you can find a better place for them to live. You could consider moving them to an interest-bearing account that may earn .5% or 1% APY. Another option is to invest the money in expanding your business, use it to decrease your debts and lower your interest payments, invest in new technology, or prepay some expenses.

Read more: 5 barriers of growth every company hits and how you can break through them

5. Utilize a Sweep Account

Most commercial banks offer a sweep account, a type of account to help maximize earnings on your income by automatically transferring money from your business checking account to your savings account. The sweeps happen at the close of business each day, and you can set the amount, typically in $500 increments.

Should your checking account dip below your minimum requirement, the funds will be automatically transferred back into your checking account to cover the outlay. This risk-free option makes it easy to build your savings for a rainy day or your next major investment.

6. Utilize Cheap and/or Free Financing Options

If you are looking to invest in your company through low to medium-cost purchases such as upgrading your computer system, buying new furniture, or replacing your company vehicles, you should take advantage of financing options that have low or no interest for the initial period of the loan.

Using this strategy for a business loan will help you save money by cushioning the cash hit to your business. If you pay off the full loan upfront before the interest rates kick in, you will save even more, therefore, making the most of your investment.

7. Control Access to Bank Accounts

To maintain positive cash flow, it is crucial to protect your assets. The best way to eliminate fraud and unauthorized use of your company bank accounts is to make sure the proper safeguards are in place.

Common safeguards include keeping the number of people who can access these accounts to a minimum, securing your IT infrastructure, frequently updating passwords, protecting your credit and debit card information and bank accounts, and using a dedicated computer for banking.

8. Outsource Certain Business Functions

It’s not necessary to hire full-time employees for every business function. You should evaluate your business needs and identify areas where it may be more cost-effective to outsource. IT management, human resources, accounting, payroll, and marketing are all functions that could be outsourced.

There are many firms, including Signature Analytics, that specialize in providing experienced professionals to handle specific business functions and manage cash flow issues. Outsourcing can save your business money, offers a flexible staffing model during the ebbs and flows of your business cycle, and it can also increase your efficiency.

9. Renegotiate Existing Service Contracts

Another tip to increase business cash flow is to review service plans and contracts regularly. Start by looking at your internet, phone bills, copiers, software support, and janitorial/building maintenance contracts to pinpoint opportunities to save.

Improved technologies and increased market competition have driven prices down on many services, so it’s worth taking the time to shop around for a better deal.

10. Maintain a Weekly Rolling Cash Forecast

A rolling cash forecast is a good practice for improving cash flow overall. You don’t need expensive programs to do this; Excel will easily allow you to project a weekly rolling cash forecast. You should include all estimated inflows, such as customer receipts, and outflows, such as vendor payments and payroll. Record this data on a weekly basis at least.

Your rolling cash forecast will help you plan staffing needs, commit to new vendors, and ensure funds will always be available to make payroll and vendor payments. As a bonus, your forecasting will help you estimate and understand your company’s sales cycle.

Read More: The Top 5 Financial Reports Every Business Owner Should Review

How Signature Analytics Can Help Your Company 

By implementing these strategies when managing cash flow, you will quickly get the upper hand on your company’s finances and learn how to increase cash flow within your business — so you will soon reap the benefits.

At Signature Analytics, we have a team of expert accounting and financial professionals including accountants, controllers, financial analysts, and CFOs; all dedicated to providing the best level of service at a price that makes sense for your business.

For additional assistance with cash flow management, developing detailed financial projections, or identifying capital requirements, contact Signature Analytics today for a free consultation.

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