3 min read
Like many small business owners, you’re probably searching for ways to improve cash flow. Investing in cash flow assets offers a way to generate more profit, often through passive income streams. What are the best assets for cash flow and how are they accounted for? We’ll cover your options in this guide.
What are cash flow assets?
Cash flow assets describe any type of asset that generates regular income. These increase cash inflows through consistent, often monthly, returns. There are two categories of assets that generate cash flow, including:
1. Aggressive investments are higher risk but generate higher returns
2. Conservative investments are lower risk but generate lower returns
Generally, a mix of both types of investment helps balance your cash flow strategy. Yet making any investment involves some degree of research and vetting. You want to maximise your cash flow through regular returns on investment.
What is cash flow from assets?
The term ‘cash flow from assets’ is used in accounting to describe the total of all cash flows related to a business’s assets. To calculate cash flow from assets, you must add together all three types of cash flow:
Operations: Net income plus any non-cash expenses such as depreciation and amortisation
Working Capital: Change in accounts receivable, accounts payable, and inventory
Fixed Assets: Total change in fixed assets before depreciation
This calculation doesn’t factor in additional sources of financing, such as sales of stock or liabilities to offset negative cash flow.
Why should you track assets that generate cash flow?
Together with other figures on the cash flow statement, cash flow from assets is a helpful metric used in accounting. It gives a snapshot of your business’s financial health, showing how much your business needs to spend on operational basics. Investors will be interested in viewing cash flow from assets to see where your business spends its money and how much is left over. These figures are used when calculating a firm’s value.
What are the best assets for cash flow?
While cash flow from assets is a calculation used in accounting, cash flow assets offer a way to improve your financial standing. Aggressive investments carry more risk, but they give the potential for higher pay-outs and improved monthly cash flow. Here are a few of the best assets for cash flow:
Real estate: Property investments are secure fixed assets capable of generating a monthly cash flow. While your business will need to pay for all associated expenses with the property, such as repair and maintenance, you can charge monthly rent to generate expected returns.
Vehicle rentals: Like properties, company vehicles can be rented out as a profitable business side venture. You’ll also benefit from certain tax benefits to offset the cost of depreciation.
Rental of existing assets: Rather than purchasing new properties or vehicles to rent out as cash flow assets, you can turn to your existing business assets. Do you have a spare office, desk space, or parking space? These could become regular income generators.
Stock dividends: Although the sale of stocks isn’t included in the cash flow from assets calculation, dividends are nonetheless a great income generator. Your business invests its money into another company that pays dividends.
Savings accounts: Place income into a high interest savings account for a lower risk investment option. This is one of the best assets for cash flow in the long term, keeping income safe from volatile markets. However, as a business owner you won’t want to set too much of your money aside; you want it to work for you and promote growth.
How to generate more cash flow from assets
In addition to investing in the cash flow assets mentioned above, here are a few additional ways to improve your overall cash flow standing.
Raise prices of your products and services
Revise terms and conditions on your invoices to encourage prompt payment
Cut materials costs with a product redesign or restructuring
Purchase supplies in bulk to receive a discount
Receiving timely payments from your customers is another great way to improve cash flow. GoCardless can help by collecting payments directly from customer bank accounts on the day they’re due. Choose from Direct Debit for recurring payments or Instant Bank Pay for one-off invoices. With our Success+ tool, payments are automatically retried at the most optimal time to reduce payment failures and keep cash flowing.
We can help
GoCardless is a global payments solution that helps you automate payment collection, cutting down on the amount of financial admin your team needs to deal with. Find out how GoCardless can help you with one-off or recurring payments.