Published on 07 August 2023
Updated on 07 May 2024
Knowing how to improve cash flow is crucial to the success of any small or medium-sized business.
If your business doesn’t have the right cash flow management strategies, you’re headed for trouble. Falling into a state of constant negative cash flow can cause debts to accrue before your accounts receivable are paid. Even with a healthy profit margin, if you don’t have enough cash, you won’t have the financial muscle to pay your suppliers or staff. And that’s going to severely harm your business over time. Put simply, the long-term financial health of your business will suffer if your short-term cash flow fails.
Key Takeaways
- Cash-flow challenges are often caused by a lack of financial management expertise
- Creating a sustainable enterprise requires implementing effective ways to improve cash flow
- Even a highly successful small business can run into liquidity issues caused by cash flow issues
- Good ways to improve cash flow include invoicing earlier, negotiating payment plans, or preparing a cash flow forecast
Following our12 ways to improve cash flowwill help you to make sure you always have enough cash on hand. Keep reading to find outhow to improve cash flow in business.
1. Stay on Top of Your Accounting
The best way to learn how to improve the cash flow position of your small business is to get acquainted with your accounting processes.
Make sure you’re working with a professional, reputable accountant. Familiarise yourself with accounting terms and the accounting methods used by your accountant. Keep your Chart of Accounts up to date.
2. Check the Creditworthiness of Your Customers
Limiting bad debts means doing your due diligence on a customer before extending them a line of credit. Checking the creditworthiness of a customer will lower your risk and help you maintain optimum business cash flow.
Research new customers by getting a credit report or checking trade references to determine the right credit terms. This way, you can avoid cash flow problems caused by providing credit to a business that then goes into insolvency. Taking out trade credit insurance that includes a credit check service is also a good way to protect yourself from the risk of bad payers.
3. Consider Changing Your Payment Terms
Changing your payment terms can help your business to steer clear of cash flow issues. Having shorter payment terms will increase your monthly cash inflow and keep your cash balance healthy.
Customers who are on 60- or 90-day payment terms can be put on 30-day terms. You can also consider moving customers who are already on 30-day terms to 14-day terms. Provide existing customers with plenty of notice about the change. Be prepared to negotiate to maintain long-term relationships.
4. Incentivize Early Payments
Give your customers a good reason to make their payments early. Reward your customers for paying their bills early by giving them discounts on their next order. For example, when a customer pays in cash within 10 days of receiving an invoice, you could offer them a 5% discount on their next order. While these discounts may cut into your profit margin somewhat, they will also boost your cash reserves.
5. Be Vigilant about Your Accounts Receivable
Poor management of unpaid invoices can cause your business to slip into a state of negative cash flow. Too many overdue invoices will increase your cash outflow and drain your reserves.
Your accounts receivable system should be tightly controlled. Put in place a system that alerts customers to outstanding invoices immediately. Make sure all unpaid invoices are followed up on and that all paid invoices are recorded.
6. Maintain Adequate Cash Reserves
In business, you have to expect the unexpected. If your cash reserves drop and you’re hit with an emergency, you might have to go into debt to get through it. Keeping your cash reserve high will enable you to cover any bad debts or unforeseen circ*mstances immediately.
7. Prepare a Cash Flow Forecast
Knowing exactly how much cash your business needs to have on hand to meet its operational costs is crucial to its continued success. Have a professional accountant prepare a current cash flow statement and determine a cash flow forecast.
A cash flow forecast will provide you with all the information you need to estimate how high your cash reserve should be. It can also help you make important decisions regarding the direction of your business and ensure you set aside enough funds for future projects.
8. Negotiate Better Deals with Your Suppliers
Business is all about negotiation. Talk to your suppliers to see if you can negotiate extended payment terms or lower costs. Consider ordering only for just-in-time inventory to minimize your outward-going cash flow. Ask your supplier for a line of credit you can use to increase your cash reserves.
9. Offer Your Customers Payment Plans
If a customer is having trouble paying the full amount of an invoice on time, you can offer them a payment plan. Putting a slow payer or a non-payer onto a payment plan will help to generate immediate cash flow for your business. It’s preferable to have a customer pay off a debt in increments than to have an unpaid invoice sitting on your books.
10. Evaluate Your Prices
Although it may seem like a drastic solution, increasing your prices can help to reinvigorate your cash flow. Take a careful look at your pricing to determine if you are in line with the market. If your competitors are charging more, there could be room to bump up your prices without scaring off your customers. You may also want to lower prices on any unsold items. Even if you sell these products at a loss, it will make room in your inventory and enhance your short-term cash flow.
11. Focus on Cutting Your Costs
Cutting costs can be a brutal undertaking, but the benefits can outweigh the pain. Review your outgoings thoroughly. Take a razor blade to your liabilities and pump up your assets. Sell off any underperforming assets or liabilities. Consider leasing equipment, vehicles, or machinery rather than buying them outright.
Evaluate your inventory and liquidate any goods that aren’t moving quickly, even if you must price them at a discount. Review your supply chain to see if any areas can be made more efficient. Reduce overtime and lay off any non-essential staff members. Cut down on your marketing budget. In some cases, you may wish to move your IT resources from on-premises software to cloud-based solutions. Keep in mind, that this can be a long-term investment.
12. Form or Join a Buying Cooperative
Joining forces with your competitors may seem counter-intuitive, but it can help you to secure better rates from shared suppliers. By forming or joining a buying co-operative, you can increase the bulk of your orders and get leverage to negotiate a more favourable price.
