How Can I Improve Business Cash Flow?
Estimated reading time: 5 minutes
One of the most significant pain points for many entrepreneurs, and one that causes many businesses to go under, is a lack of cash flow.
Even if your business grows quickly, you may not have enough funds to pay your staff and all other bills.
To avoid getting into this predicament, dealing with high-stress levels, it is important to get a handle on cash flow, no matter the size of your organization.
Read on for some key ways you can do this today.
1. Pay Attention
Cash flow determines many factors of your business. Pay attention to your cash flow by projecting your income, understanding your monthly expenses, and knowing your accounts payable and receivable schedule.
For instance, if you operate a business with seasonal highs and lows, create a process to monitor the cash flow during low times of the year.
2. Encourage Timely Payments
Help customers pay their bills on time by offering them incentives for early payments.
For instance, offer a discount for early payments.
Another incentive might be to offer customers the option to make partial payments.
Use your accounting team to brainstorm other ideas that would be the carrot to get the money to you quicker.
3. Be Clear with Customer Credit Terms
Credit can be a tricky thing, particularly for businesses that don’t have good cash flow.
Do your due diligence to minimize your risks for bad debts.
Be wary of giving credit to someone because you “like” them. Commit to running credit checks on all vendors to get a clear picture of their payment history.
Ensure your customers understand your credit terms and follow through on term commitments.
For instance, if a customer misses payments after a few months, be strict with a Cash on Delivery (COD) requirement until they can prove their creditworthiness.
4. Negotiate Your Payment Terms
The name of the game is delaying payments to increase cash flow.
Suppliers will be flexible with customers who are good for the payments.
Negotiate with your suppliers and work to extend your payment terms, improve return times, or access to bonus products for timely payments.
For instance, if you can negotiate a 90-day return policy, you can send back the product that is taking up space and improving your cash flow.
Make good on your credit by paying promptly to maintain flexibility with your cash flow.
5. Control Inventory Levels
If you run the kind of business where you need to keep inventory such as stock, spare parts, or other supplies, see what you can do about reducing the amount of inventory you have on hand at any one time.
Too many (or the wrong) products sitting in your backroom or warehouse can tie up funds that could be better spent elsewhere.
To ensure you’re stocking the right items, regularly review your sales history and the requests you get from customers to see if what you have is what people want to buy.
Rather than an annual inventory check, you should examine your inventory monthly.
Determine your bestselling products, order them in large quantities to satisfy demand, and then reduce your purchases of everything else.
If you find you have quite a bit of old, outdated, unpopular, and/or damaged inventory, have a sale to move these items out the door.
This will get some more cash into your business while freeing up room on your shelves for your “bread and butter” products.
Another way to reduce your inventory is to set up a pre-order system to inform customers about the new lines you’re sourcing or the specials you have coming up and encourage them to place an order in advance.
This allows you to determine which items will sell well, reduces the risk of getting stuck with unwanted products, and brings money in immediately to help you pay your suppliers.
6. Monitor Business Expenses
Business expenses can be a slippery slope. It is easy to spend money on things that you don’t necessarily need to operate the business.
Use employees to help you identify ways to reduce unnecessary expenses.
For instance, employees are closest to the process and may be able to point out waste on products or rework.
Consider outsourcing jobs that are not core to your business.
For instance, you may be able to save costs by outsourcing the management of your HR department rather than paying a full-time HR Assistant.
7. Maintain Competitive Pricing
We have all felt the sting of the inflationary environment today.
Spend time reviewing your product pricing to ensure you are covering the costs and hopefully making a profit.
For instance, the cost of energy has gone up significantly. Adjust pricing based on increased utility costs for operating a warehouse.
8. Talk To Your Bank
Many banks work with small businesses and help them bridge gaps in cash flow.
Talk to your bank to explore creative finance options such as short-term loans, lines of credit, or business credit cards.
9. Maintain An Emergency Fund
Most businesses experience good times and bad times.
Incorporate an emergency fund line item in your annual budget and create a safety net during those high cash flow periods.
Commit to saving a percentage of your monthly income and save it for that rainy day.
10. Establish Process Improvement Teams
Organizations have learned that utilizing process improvement within internal operations can save money and increase cash flow.
Use teams to identify areas of redundancy and waste and make recommendations to improve efficiency and eliminate costly and slow work processes.
11. Find An Expert Coach
No one goes into business and wants to think about cash flow issues.
Find a trained professional who can objectively look at your operation and offer suggestions for improving how your business is run.
Your bank representative, accountant, or small business consultant can help identify ways to earn more and spend less.
Cash Is King
Be encouraged. Cash is king, but improved funding, control of inventory, and targeted process improvement can help your business improve its valuable cash flow.
Now might be a good time to sit down and brainstorm ways for your business to reduce costs and improve monthly cash flow.
