What is cash flow?

Cash flow is the real or virtual movement of money at your business. It helps measure your ability to generate cash and also pay your bills and expenses. Cash flow can refer to cash regarding your normal operations, your investments, and any financing you have.

Cash flow should not be confused with profit. Profit is your revenue after all expenses are paid, while cash flow is the amount of money that comes in and out of the business.

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Why is it important to improve cash flow in a small business?

Improving cash flow is important for any small business if it wants to meet financial obligations, stay afloat, and progress towards successful growth.

With cash flow optimised, there won’t be any trouble or delays with paying bills or spending money to make improvements or invest in new opportunities.

Without paying close attention to cash flow, small businesses can quickly encounter challenges – such as not being able to pay staff or suppliers in time.

Why do hotels have to manage cash flow?

It’s particularly important for hotels to manage cash flow because revenue is everything – hoteliers need to be able to accurately forecast their cash flow to ensure revenue doesn’t dry up.

Cash flow is crucial for hotels for a number of reasons, including:

  • High costs: Hotels can have a number of high costs such as rent, utilities, and salaries. These are costs that must be paid, regardless of how well the hotel is performing from an occupancy perspective. This means that hotels need to generate a certain amount of cash flow each month in order to cover their costs.
  • Seasonality: For some hotels seasonal business is their main source of income, which can make it difficult to maintain a steady cash flow. 
  • Unexpected events: Economic pressure, natural disasters, political instability, and more can all dramatically impact travel and hotels as a result. If business stagnates for too long, cash flow can suffer.

By managing cash flow well hotels can ensure they are meeting their financial commitments and are also prepared for any hurdles they may encounter.

Strategies to improve cash flow

There are a number of general strategies hotels can use to improve cash flow.

Here’s a list of 5 to focus on:

1. Reduce operating expenses

Naturally, by reducing expenses you’ll have more cash on hand. Some ways to do this might include reducing unnecessary costs like food wastage or expensive lighting, outsourcing some services like housekeeping and cleaning, getting better supplier deals, or using software to increase efficiency.

2. Increase revenue

We have entire guides dedicated to increasing revenue but some good ideas to boost revenue include raising room rates, attracting more bookings, upselling guests on additional services, generating ancillary revenue, offering packages, or opening your space up to outside parties to host events, classes, or social gatherings.

3. Optimise invoicing and payments

It’s important to set clear payment terms to guests and also ensure that invoices are sent promptly so cash is coming in regularly. Also, don’t delay too many of your own payments and let debt stack up, because making too many bulk payments at once will hurt cash flow. 

By using technology, you can start to automate payment and invoicing processes.

4. Prioritise your activities

Delay the start of certain projects until your cash flow is healthy. For instance, if you had big plans to perform renovations but you underperformed in the last financial year, you might need to delay the renovations to avoid excessive debt. When business picks back up, your cash flow will be able to support your project.

5. Use forecasting

A cash flow forecast can help hotels to predict their future cash needs and to identify any potential cash flow problems. This information can be used to develop a plan to improve cash flow. For example, if you examine past performance and you know a certain month is always strong, try to make plans around this so you can spend money freely or maximise your profit at the time.

How to improve cash flow management

You can improve cash flow management at your hotel by focusing on being efficient, proactive, and innovative.

Here’s how to improve these three areas:

  • Efficiency: This comes from reducing any unnecessary expenses, automating payments and invoices, and improving your hotel’s inventory management to ensure you are maximising bookings.
  • Proactivity: Be proactive by setting clear expectations around invoices, performing regular forecasts and analysis, and re-negotiating any deals when you think a better opportunity exists.
  • Innovation: You can make big improvements by investing in modern, best-in-class technology solutions. Using the right software will make it easier to be both more efficient and more proactive in the long term.

By Dean Elphick

Dean is the Senior Content Marketing Specialist of Little Hotelier, the all-in-one software solution purpose-built to make the lives of small accommodation providers easier. Dean has made writing and creating content his passion for the entirety of his professional life, which includes more than six years at Little Hotelier. Through content, Dean aims to provide education, inspiration, assistance, and, ultimately, value for small accommodation businesses looking to improve the way they run their operations (and live their life).