10 Strategies To Improve Cash Flow
If you’re reading this blog, then you already know how important cash flow is. Cash flow is the mainstay of your business. Positive cash flow means you can successfully run and grow your business, and negative cash flow — well, that’s bad news.
But what do you do when you have negative cash flow? How do you increase your positive cash flow and get your business where it needs to be?
Cash flow is affected not just by bringing in more cash inflows, but also by limiting your cash outflows. This means you have to manage your expenses just as much as your sales. Read on for ten practical tips to help you improve your cash flow and get your business on the right track.
Table of Contents
- 1. Send Invoices Right Away
- 2. Get Customers To Pay Invoices On Time
- 3. Increase Prices
- 4. Expand Sales Market
- 5. Reevaluate Operating Expenses
- 6. Liquidate Old Inventory
- 7. Pay Vendors At The Right Time
- 8. Open A Business Savings Account
- 9. Consider A Cash-Back Business Credit Card
- 10. Take Out A Small Business Loan
1. Send Invoices Right Away
Sales and invoices are the lifeblood of a small business. You can’t get paid if you don’t send invoices. It’s as simple as that.
Make sure you stay on top of invoicing your customers. The quicker you send invoices out, the faster the cash comes in. If your current invoicing process is tedious, consider switching to a cloud-based accounting app with attractive, easy to create invoices. Software like QuickBooks Online and Zoho Books both offer great invoicing capabilities that can help you speed up your invoicing process and increase your cash flow.
Our comprehensive accounting software reviews cover QuickBooks products, Xero, Freshbooks, Sage, and more of the top cloud-based and locally-installed accounting solutions on the market today. If you want a quick peek at the top contenders, check out our accounting software comparison chart.
2. Get Customers To Pay Invoices On Time
Another key to increasing your cash flow is getting your customers to pay their invoices on time. We know this is easier said than done, but there are plenty of practical strategies to increase the likelihood of getting paid faster. Here are some of our top invoicing tips:
Follow Up With Invoice Reminders
Make sure you remind your customers when their invoices are due. Send email reminders a few days before the invoice is due, the day the invoice is due, and a few days after. If they still haven’t paid, give them a call and continue sending reminders. Many accounting programs have built-in invoice reminders that you can automatically send to late-paying customers.
Give Your Customers Incentives
Consider offering a discount to customers who pay their invoices before a certain time. If your invoice terms are Net 30 (due 30 days after the invoice is sent), but you really want your customers to pay their invoices in the first week they receive the invoice, offer a small discount. Customers looking for a deal will be more likely to pay their invoices faster, which means you get cash faster.
Charge A Late Payment Penalty
Another key to successful invoicing is having a strong invoicing policy. Choose a consistent time when invoices are due (ex. due upon receipt, Net-15, Net-30, etc) and stick to it. You might even take it a step further and include a specific due date to eliminate any confusion. Have a late payment penalty in place for customers who exceed the due date. Not only will this help increase your chances of getting your money, but it will also set you apart as a professional.
When it comes to late payment penalties, be upfront about the penalty, when it will be charged, and how much will be charged. You can often include this in the terms and conditions section on your invoice. Do some research on what a normal late penalty policy looks like for your industry before implementing one of your own.
Consider Invoice Factoring
If the above strategies don’t work or you need cash right away, another option is invoice factoring. Invoicing factoring is the process of selling your unpaid invoices to a company in exchange for immediate cash. The factoring company takes a small cut of the money you earn, but the payoff is that you aren’t stuck waiting on customers.
Invoice factoring can be a great cash flow solution, as can invoice financing. Check out one of our favorite invoice factors, BlueVine, to learn more. Or take a look at Fundbox, an invoice financer, for an alternative solution.
3. Increase Prices
If your cash flow is poor, it may be time to consider increasing the prices for your products or services. Ask yourself:
- What are my competitors charging?
- Have the prices for equipment or inventory increased?
- How much manpower does my inventory assembly or services require?
- Do my prices compensate for the time put into my creating my products?
- Are my prices too low? Do my products come off as cheap or valuable?
You want to strike a balance between keeping your prices competitive and fairly compensating the hard work you and your employees do. At the end of the day, you want to make sales, but you also want to make a profit. If your prices are too low, you may be selling yourself short. In some cases, lower prices can also make your company seem less qualified.
4. Expand Sales Market
Another solution to increase positive cash flow is to brainstorm new sources of income. Get the dream team together, sit down with some coffee, and consider new ways to expand your sales market. Here are a few new sales possibilities to get the ideas rolling:
Add New Services Or Products
Think about the current items or services you offer and consider if there are other items or services you think would be a good addition to your business. Think outside of the box and consider alternate ways to earn income as well.
Maybe your coffee shop could start offering homemade lemonade for the summer, or maybe your event planning service could add a cleaning service to maximize on business. Your office might even be able to rent out its large outdoor space for parties and events on the weekends when it’s not in use. Get creative about new ways your business can generate income, which will in turn increase cash flow.
Create A New Marketing Strategy
If the products you offer are already spot on, perhaps your marketing could be expanded. Think of new ways to get the word out about your business. Consider if there are any other groups of people that could benefit from what your business offers. Bringing in more customers is a great way to bring in more cash flow.
Encourage Customers To Buy More
Another great way of improving cash flow is getting your existing customers to spend more. There are two great ways to do this:
- Bundle Items: Sell similar items together to encourage increased spending.
- Advertise Related Products: If you use an eCommerce platform, advertise additional products that the buyer “may be interested in” or that “others also purchased.”
Both of these can be great ways to expand your existing sales (rather than having to expand a whole new sales market). If you want to start advertising related products or selling your products online, check out our top eCommerce recommendations.
Don’t Forget Your Loyal Customers
Another great way to expand your market is by letting happy customers do it for you. Encourage loyal customers by offering discounts or implementing rewards programs, like stamp cards for multiple purchases. Also, consider implementing a referral program. This way you can encourage your loyal customers to grow your business for you through word of mouth.
5. Reevaluate Operating Expenses
Managing cash flow isn’t just about getting more cash to come into your business. It’s also important to reduce the cash going out of your business as much as possible. Here are five tips for reducing your business’s operating expenses, so you have more cash to spare.
Cut Out Unnecessary Expenses
Take a careful look at your cash flow statement and analyze your company’s business expenses. Ask yourself these two questions:
- Are these expenses necessary?
- If they are necessary, is there a cheaper alternative?
Carefully consider your current expenses. Cut out any that are unnecessary and try to minimize the necessary expenses as much as you can. It may seem difficult to do, but you (and your wallet) will feel much better knowing that you’re managing your cash flow and expenses effectively.
Streamline Your Business Processes
Another important aspect of managing your cash flow is making sure your business is running as efficiently as possible. Focus on cutting time, not just costs. Analyze all of your current business processes and judge how efficient the current process is, and if there’s any way to speed up that process.
Maybe that means implementing accounting software to send invoices faster or rethinking your employees’ inventory assembly process. By using time efficiently, you can get more done, spend less on wages, and avoid excessive overtime pay (which can put a huge dent in your business’s cash).
Purchase More Efficient Equipment
One way to increase your company’s speed and efficiency is to purchase better, updated technology and equipment. While it may cost a bit to purchase the equipment initially, you will save time, which cuts back on wage expenses. This may also lead to increased production or the ability to take on extra projects, which leads to more incoming cash.
Looking for equipment financing? Check out our comparison of the top equipment financers for small businesses.
Ask Suppliers For Bulk Inventory Rates
Some vendors, especially those with whom you have a good relationship, may offer discounts for buying inventory in bulk. These can definitely be worth taking advantage of, so don’t be afraid to ask your suppliers if they have any deals.
Consider Leasing Equipment
If you don’t have the cash to flat-out buy equipment or you don’t qualify for a working capital loan, it might be worth considering leasing equipment. You lose the advantage of having the equipment as a fixed asset for your business, but you gain lower monthly payments, which may be what you need to keep your cash flow in check.
6. Liquidate Old Inventory
Inventory is one of the largest business expenses you might encounter. You need inventory to make a profit, but you want to make sure the inventory you’re buying is actually selling. Carefully consider which products sell well and which you have a hard time turning over. Take a look at your sales patterns to see when your busy and non-busy sales times are and order inventory accordingly.
If you have any old inventory that you’re having a hard time getting rid of, consider liquidating the items. Any money coming in is better than no money.
7. Pay Vendors At The Right Time
Be strategic about when you pay your vendors. If your vendor offers a discount for paying early, be sure to pay in the required time to save some money. If the vendor doesn’t offer a discount, pay when it’s most favorable for your business.
Say your bill is due on June 1st. Your cash flow statement records show that May is a slow month for your business, but June has a history of higher sales. Pay your bill the last day it’s due so that you can report positive cash flow for May.
If you need even more time to pay off bills, you can also consider paying with a business credit card. This way you can pay off the expenses over a period of time rather than all at once. Take a look at our business credit card reviews to find the right card for you.
8. Open A Business Savings Account
If you don’t have one already, open a business savings account where you can earn money on interest. This is a simple way to generate a bit of extra cash, and it’s a smart way to ensure you always have a cash flow cushion for your business.
9. Consider A Cash-Back Business Credit Card
Using a cash-back business credit card can be a strategic way to earn cash on your expenses. As long as you use the card wisely and can afford to make regular (if not full) payments each month, a cash-back credit card is easy money. There are several great cash-back rewards cards out there. Here are some of the best cash-back business cards for small businesses.
10. Take Out A Small Business Loan
Another option to increase cash flow is to take out a short-term loan or line of credit. With a short-term loan, a lender gives you a lump sum of money that is paid back in regular installments over a short period of time. With a line of credit, a lender grants you a max borrowing amount that you draw from any time you need cash; payments are made only on the money used.
While the prospect of owing money may make you squeamish, there are several great reasons to take out a cash flow loan:
- Expand your business
- Purchase inventory
- Take on a new, profitable project
- Purchase new equipment
- Unexpected expenses
- Cover off-season slumps
If a loan sounds like a good cash flow solution for your business, check out our top small business lenders to find the right loan for you.
All of these tips can help you manage and increase your cash flow. Whether you decide to focus on increasing your sales, decreasing your expenses, gaining capital — or a mix of them all — you’re well on your way to increasing your cash flow and running a more successful business.