Every now and then we need to buckle down and take better control of our business’s finances. Although they can be tough decisions, during a cash crunch expenditure adjustments and budget cuts need to be made.
The truth is, no business is immune to periodic capital constraints or economic downturn. Even during times of growth and economic prosperity, business owners need to be prepared to make tough choices when it comes to cash flow management.
Below, we break down how to zero-in on your business’s capital outflow so you can make your company more sustainable by improving cash flow. Ready to retake control of your company’s financial future focused on long-term profitability? Let’s get started.
What Is Cash Flow?
Cash flow is the net sum of cash and cash-equivalents that flow in and out of a business over time. A company that generates positive cash flows is profitable, which implies that the company’s shareholders gain value as a consequence of ownership.
Every small business that prepares its own financial reports must be familiar with the concept of cash flow. For a business owner to understand their company’s liquidity and general financial health, they must be able to read the elements of a cash flow statement, which are:
- Operating cash flow
- Investing cash flow
- Financing cash flow
If a business’s cash flow statement indicates that the sum of the company’s liquid assets are rising, this implies that they have positive cash flow. By extension, positive cash flow implies that the company can settle debts, reinvest, pay shareholders, cover operating expenses, and generally pay for all its needs.
Cash Flow Improvement Strategies
A good business owner should always be looking for ways to improve cash flow and keep their cash flow statement in the black. However, it’s not always easy managing a company’s expenses during economic downturns or when belt-tightening is required.
This is why we put together this list of our favorite tips and strategies for increasing cash flow and learning how to improve cash flow. By applying these strategies, your business can remain liquid and will be able to settle its shot and long-term liabilities. In other words, cash flow planning keeps your head above water when the going gets tough.
Incentivize Early Payments
Among the many ways to improve cash flow is to incentivize the early payment of loans or invoices. Since getting invoices paid early helps with balancing your cash flow, you can encourage early payments by offering a small discount (i.e., 5 percent) for those who finalize their invoices or payments early.
Lease, Lease, Lease
Capital-intensive industries such as the medical or dental professions require massive upfront equipment expenditures to get off the ground. By paying for these expensive items, your business’s finances take a major hit which sometimes requires several years to recoup. By contrast, lease payments are small and incremental which helps improve cash flow.
To get around a difficult cash scenario, we recommend leasing equipment until your business is more established and can afford to finance equipment by other means. That is unless, of course, your business has a lot of surplus cash to throw around in its early days.
Check Your Clientele
Running credit checks on your clientele isn’t a bad idea if you want to improve business cash flow. This is especially true if your business requires customers to sign up or register for a service. Think about it—if your clientele has poor credit, then you cannot be fully confident that they will pay you for your services on time.
Trust us, we know that the last thing you want to do as a business owner is to forego a sale. However, receiving consistently late payments can do serious damage to your business’s cash flow plan and financial prospects. If you absolutely must follow through on the sale, tack on a higher interest rate to compensate for the added risk.
Rethink Your Inventory
Face it, some products in your lineup are winners and others are losers. As the expression goes, “kill your darlings.” In other words, eliminate or liquidate products in your inventory that are tying up cash and aren’t bringing money into your business—even if you love the product.
Mismanaging your inventory, especially over the holiday season, is one of the fastest ways to throw a wrench in your monthly cash flow plan. Good cash flow businesses are those that have no qualms about walking away from problematic products that don’t sell.
If you want your receivables to arrive as quickly as possible (which you do!), then you should always prioritize your invoicing. Once the services have been rendered to the client, immediately forward the invoice to your client within 24 hours.
To help expedite the invoicing process, consider investing in accounting and business invoicing software such as Sage Intacct or NetSuite. Full-suite online services such as these can automate your invoicing, so you never forget to send one out.
Rethink Your Prices
Although few business owners want to do it, adjusting prices is something that every successful entrepreneur needs to be willing to do sometimes. Small business cash flow depends on your ability to maximize profits. If your products are undervalued, it might make sense to marginally bump up your prices to help strengthen your cash inflows.
Modernize Your Payments
Today’s business owners should be processing payment digitally wherever possible. If you want to find out how to increase cash flow while keeping expenses low, making the switch to an electronic payment processor is one of the best ways to do just that.
The benefit of electronic payment systems is that you can pay a bill or invoice on the day that it’s due. This way, you can take advantage of grace periods and ensure that your cash flow is predictable and on schedule.
Think Long-Term When Borrowing
You should only borrow money for your business if there is a tangible long-term benefit at stake. Otherwise, it might be in your best interest to find another way to raise the capital (or forego the expense). Not only is informed borrowing one of the best cash flow strategies but it’s also sound advice for general business financing as well.
Borrowing should always be done with your business’s strategic interests in mind. In other words, outline your company’s anticipated benefits of borrowing the loan. Every loan needs an intended purpose, a specified ROI, and a repayment plan.
Track Your Data
It’s difficult to learn how to manage cash flow in business without having data to analyze and rely on. Therefore, we recommend that small business owners use analytics software to track every sale and expense that your business makes.
When it comes to cash flow management for small business owners, cash flow management tools such as Pulse, Cushion, and Float are great assets to have. Using these software tools enables your business to view all inflows and outflows of money in your organization objectively. With this data, you can make informed choices about where to make cuts.
Work the Phones
Sometimes email reminders just won’t cut it. If you are dealing with a problematic client that won’t answer your invoices or nudges (usually, this is common with less tech-savvy individuals), don’t be shy about picking up the phone and making a call. When invoices are past due, there’s nothing wrong about sticking to your guns and voicing your concerns over the phone.
When you send an email, it can be too impersonal to effectively communicate tone and urgency. As such, some clients have a hard time determining whether they need to pay it right away. Over the phone, most individuals can pick up on whether it’s finally time to pay the bill.
Last, consider depositing into interest-earning checking accounts. Since these accounts have higher interest rates than most others, depositing in these accounts pays dividends in the long-term. However, it’s also important to keep your cash liquid—therefore, we suggest seeking out short or medium-term certificates of deposit (CDs) only.
Cash (Flow) Is King
Ultimately, if you take advantage of the cash flow tips listed above, you can position your business for lasting success. After all, you should always strive to find new ways to improve cash flow since having extra cash on hand can come in handy when unexpected expenses arise, or during times of economic downturn.
Prudent business owners should concern themselves with pricing themselves competitively, maximizing profitability, and creating conditions for long-term success. With a strong cash flow strategy that generates a reserve of on-hand cash and liquid assets, your business becomes more resilient and better positioned to withstand adversity.