There are few things that function as a better indicator of a business’s overall well-being than cash flow. After all, if your business continually has healthy cash flow, then you can be confident that things are going well. Don’t forget that cash flow troubles account for a huge percentage of business closures — according to one study, more than 82% of small businesses that fail do so due to cash flow issues.
Even if things are generally going well, it’s still recommended to look at ways to improve the cash flow of your business. After all, you never know when lean times might come. Building up your cash reserves when things are going well makes it easier to manage the periods when they’re not.
There are a bunch of steps businesses can take to improve their cash flow. We’ll run through some of the most effective methods below. Take them all on board, and the financial health of your business will never have looked better.
Reduce Your Expenses
Reducing the amount of money that flows out of your business is an excellent first step for improving your cash flow. So take a close look at your expenses, and see if there are any that can be cut.
It’s normal for expenses to add up, especially if you’ve been running your business for a few years, but you might find that you can reduce the cost of some of those expenses, or even eliminate them altogether in some cases. Remember — you might like to make a bunch of sales that bring more money in, but in the eyes of cash flow, reducing what flows out is just as effective.
Invoice Promptly
Making a sale is a good start, but until the money is in the bank, it can’t count towards your cash flow. Imagine this scenario: you have bills of $5,000, but you’ve made sales totalling $15,000. You’d only be completely fine if the money from those sales lands in your account before the $5,000 bill is due.
You can increase your chances of getting your money earlier by invoicing your customers as early as possible. Remember: they can’t pay you until they receive the invoice! There’s software that’ll allow you to automatically create and send invoices, ensuring that it’s with your customer as soon as possible.
Offer Discounts
It would be nice if every customer paid as soon as their invoice arrived. But in the real world, that’s just not realistic. You’ll need to include a due date on your invoices, as well as details of any penalty fees that may apply for late payment.
Still, you’d rather not wait until the final due date before getting your money. One way to encourage your customers to make an early payment is to offer a discount if payment is made within the first three days. This doesn’t have to be a massive discount — even 5% will do — but it should help make some of your budget-conscious customers pay as quickly as they can.
Make Paying Straightforward
Your customers will be more likely to pay you quickly if it’s easy for them to do so. If you have complicated payment processes, then it’ll continually be something that the customer does later, later, later. No one wants to spend their time figuring out how to pay.
On the other hand, if it’s as simple as clicking a couple of buttons, then your customers will be much more likely to pay promptly. So take a look at how you’re asking your customers to pay, and make some changes if it’s any more difficult than it needs to be. There are a host of payment processors out there that make payments as straightforward as possible.
Increase Prices
Many business owners shy away from increasing prices, but they don’t always need to be. Done correctly, your customers won’t only not mind that your prices have increased, but it’s possible that they won’t even notice. It’s best to keep any increases modest, of course, so aim for somewhere in the region of a 3 – 5% increase.
This is a tactic that you can employ on a semi-regular basis, should you choose to, but remember that in that case, you’ll need to show that the repeated increases are worth it. As always, working to continually improve and advance your business is one of the best strategies for long-term growth and success.
Keep An Eye on Upcoming Expenses
Your cash flow might look healthy right now, but it might not look so rosy once all of your upcoming payments have left your account. It’s important to judge the health of your cash flow once all transactions — including incoming invoices and outgoing expenses — have been accounted for. You can keep an eye on upcoming expenses by using purchase orders. What is a purchase order, we hear you ask? It’s simply a document that you send to the seller when you make a purchase. It offers a wide range of benefits, including providing legal protection and preventing miscommunication. It’s also great for managing your cash flow since you can use it to track outstanding payments that you still need to make. Plus, ensuring your employees use purchase orders can eliminate impulse purchases that may damage your cash flow.
Vet Your Customers
It’s nice to make a sale, yes, but only if the customer intends to pay you. If they don’t have that intention, then not only will you lose a little faith in humanity, but your cash flow will also suffer. You’ll have lost the cost of whatever it was that you sold them, and you might find it difficult to pay your bills, especially if it was a big sale.
One way to avoid this problem is to perform a credit check on your customer. This is recommended if it’s a big value sale, or if you have any doubts about their ability/intention to pay. A credit check will show you a record of any missed payments and whether they have any outstanding debts. If they do, then you don’t necessarily have to turn them away, but you’ll be well advised to ask for upfront payment.
Utilize Invoice Factoring
Invoice factoring isn’t perfect, but it can be a useful tool if you find yourself in cash flow difficulties. With invoice factoring, you can get most of the value of the invoice in advance from a third-party company. You’ll pay the money back once the invoice is paid. It’s best to shop around if you plan on using invoice factoring because costs can vary. In general, you’ll find that you’ll need to pay around 2 – 5% of the total cost of the invoice to use this type of service.
Talk To Your Suppliers
You can improve your cash flow by ensuring your customers pay as quickly as possible. But you can also improve it by speaking to your suppliers and changing the payment terms. As a new customer, you were probably given limited payment terms. If you’ve proven to be reliable, then it’s worth asking if they’ll extend the payment period. You could benefit a lot from switching from a 30-day payment period to a 60-day payment period.
You can also improve your cash flow by reducing how much you send to your suppliers. It’s worth asking for a discount, or even looking to see if there’s a competitor out there who can offer the same goods/service for a better price.
Avoid The Big Expenses
In some cases, you’ll need to spend money on a big piece of machinery or other equipment in order to grow your business. However, how much you spend is within your control. Rather than buying outright, look at leasing or renting the equipment instead.
Invest in Employee Retention
Losing and replacing employees can be a massive drain on your finances, not to mention on company morale. Since the cost of finding, hiring, and onboarding a new employee is so steep, it’s important to work on ensuring that your employees are happy to stay with your company. Offering perks and bonuses, allowing remote working, and increasing salaries can help boost employee satisfaction. While there’s a cost involved, it’s a lot cheaper than continually replacing staff members.
Hire an Expert
Finally, consider hiring an accountant for your business. This can help with any number of finance-related matters, including boosting your cash flow. An accountant will keep a close eye on your finances, help minimize taxes, and identify any unnecessary costs. Plus, they’ll help with cash flow forecasting, which makes it much easier to plan for leaner periods when you might not have as much money flowing into your account.
Conclusion
There’s no way to guarantee business success, but having excellent cash flow management principles can certainly go a long way. With so many businesses failing due to poor cash flow, investing the time and energy to ensure that yours is as solid as can be is essential for keeping your business in good financial health.