Cash flow management is essential to the success of any company and for a small business it’s often the reason a business succeeds or fails.
The worrying statistic is that poor cash flow is responsible for around 82% of all business failures, so improving your company’s cash position is critical to your business’ long-term success.
Unlike trading profits, which are the year-end summary of your business’s ability to make a profit, cash flow impacts your business success on a day-to-day basis. In this article, we describe some of the techniques that you can implement to improve your cash flow. Some, for example invoice discounting, mean working with other organisations; other techniques such as changing payment terms are entirely in your control.
Do you have a cash flow problem?
To start with, you need to understand if your business has a cash flow problem and what’s causing it, when does it occur and how big of an issue is it.
Once you’ve created a forecast you can start to see if there are particular months where your business will not have enough cash to pay its bills and how to solve the problem. It could be as simple as changing how you get paid by your customers, or changing the payment terms on your invoices, or asking your suppliers for longer credit terms to pay them.
Of course, poor cash flow is not the only reason a business will have problems – if your business is not profitable (or if you are just starting up, then it needs to be profitable in the long term), then you will always be battling against negative cash.
10 tips to improve cash flow
Therefore, to achieve maximum profitability and further business expansion, let’s investigate the top ten techniques to enhance cash flow.
At first glance, it may appear challenging to boost a business’ cash flow, but making a few adjustments to the way operations are carried out could have an immediate impact.
Consider using this list of ten techniques as a how-to manual if you want to learn how to enhance cash flow in a small business.
1. Invoice discounting / factoring
If your company is an established business and has financial history of being well-run, you might want to consider invoice discounting or invoice factoring. These only work if your business issues invoices to customers and are waiting to be paid.
Invoice discounting or factoring are services normally provided by a bank or financial firm that effectively loans your business the value of the invoice and then you repay it when the invoice is paid by the customer.
For example, if you issue an invoice for £1000 payable on 60 days terms, the invoice discounting firm might loan you £800 immediately and then you repay this when the customer pays the invoice in full. Some invoice discounting or factoring suppliers will manage the entire invoicing process and carry out credit collection, but the services all differ.
There is a charge for this service, so if your profit margins are very slim you might not find this works for you. Ask your bank as a starting point and then look at alternative suppliers to see if this might work for your business.
2. Accept payment by credit card
If you currently issue invoices to your customers, you might want to consider offering payment by credit card. Instead of waiting for the normal 30 days before a customer pays your invoice by bank transfer, they might be willing to pay immediately using a company credit card.
Services such as Stripe, Square, Worldpay, or even Paypal all allow you to send a request to pay an invoice directly; these services normally pay you a few days after processing the credit card.
3. Implement Electronic Payment Systems
When you submit payments to your suppliers using electronic means, your company will have more time to make payments.
This payment postponement effectively boosts the company’s cash position.
In addition, business credit cards typically come with grace periods that allow the price to be delayed for several weeks.
This may also assist in increasing the amount of cash flow that is available to your small business.
Using your credit card to make purchases might also earn you attractive benefits.
It is essential to avoid accumulating an excessive amount of debt before paying it off.
4. Utilize A High-Interest Savings Account
Liquidity can be provided to small businesses through high-interest savings accounts, which helps these organizations enhance their overall cash flow.
Several banks allow customers to earn interest on their accounts by maintaining a certain minimum balance.
The interest rates offered on corporate savings and money market accounts will be higher than those provided on ordinary savings accounts.
5. Raise prices of your goods or services
This is often very difficult for a founder or business owner to carry out – but you would be surprised how often a business under-values what it sells. Of course, if you are in a highly competitive marketplace then you will need to differentiate to justify a price increase, but customers are often very accepting and understanding of price increases (when the value of the products or services justifies it).
The first step is to understand the value you are providing to your customers. If you are selling apples on a market stall, then your customers can immediately compare your prices with those of other stalls. However, if you differentiate by selling organic apples or those grown from a local farmer, or a rare breed, then you have a value that gives you an opportunity to test increasing your price.
If you sell professional services or software or a unique product, then speak to your customers to understand how your product solves their problem and what they might be saving by using your product – and then price accordingly.
However, it is best to try out a few various price schemes before settling on one. Testing the maximum price is called the price elasticity – how far can your stretch the price before your customers no longer see value.
You will be able to create prices that are appropriate for all kinds of customers if you experiment with the different pricing structures available.
The goal of raising pricing is to determine who will pay for the good or service before sales begin.
6. Provide a discount for early payments
If you are selling a service or software or a subscription product, then you could offer a discount in exchange for a customer paying a full year in advance. You often see this with software businesses that offer a subscription at (for example) £10 per month or £100 per year. The customer benefits from a discount, the business gets cash early to pay for growth.
It’s a win-win situation for everyone involved: As a small business owner, you get paid ahead of schedule, and your clients get the discounts they were expecting.
Getting paid ahead of schedule is one of the most effective methods of generating cash flow for a small business.
7. Change your payment terms
Similar to the previous suggestion of early payments, if your business issues invoices why not change your payment terms from the normal 30 days to 7 days or 14 days. This is very unlikely to put off a customer (and if they don’t like these terms, they might just ask for better terms).
8. Consolidate Your Debt
Cash flow management will be a lot more challenging for your company if it has monthly loan payments.
Having high-interest credit card debt might make it more challenging to manage your cash flow.
As a result, debt consolidation can be an effective means of enhancing cash flow.
There are a lot of financial institutions that provide term loans with the aim of debt consolidation.
9. Change how you pay your suppliers
There are two ways to change how you pay your suppliers – ask for a change in payment terms (how long you have to pay for the goods or services they provide; and paying less to your suppliers.
Changing payment terms can often help resolve short-term cash flow issues identified by your forecast. For example, you might be able to ask to change payment terms from 14 days to 30 days, giving you more time to sell products and receive payment from your customers.
Reducing the price you pay is often more difficult and might mean looking at alternative suppliers. It’s a good way to help you trim operating costs and could improve your cash flow long term. Keeping on good terms with your key suppliers could allow you to ask for their support in extending payment terms or reducing their prices for your business.
Leasing assets such as equipment, real estate, or supplies could be more expensive in the long term than outright acquiring those assets.
On the other hand, it can be a better choice for a company whose primary concern is the profit margin.
Even if the principal objective of your business is to raise the amount of money it brings in, it is necessary to keep a steady flow of cash coming in so that it can continue to run smoothly.
If you lease instead of buy, you’ll be able to make payments in more manageable chunks of money.
You can improve your cash flow by making a series of smaller amounts.
Why cash flow is so important
Small businesses fail for a lack of cash flow. “Running out of money” is the fastest way to fail.
Starting a business: Cash flow difficulties are tricky. Many expenses are draining your bank account.
No sales or paying customers? You’ll need a temporary line of credit or other cash resources to improve your cash flow.
Cash flow is critical in a company’s first six months. Without adequate cash, you won’t succeed.
A new firm can’t get credit from suppliers, and customers may want to pay on credit, causing a “cash crunch.”
We have described ten ways that you might consider using to help you improve your cash flow.
Cash flow is so important to any business, especially when starting up, that you need to pay a lot of attention to your company’s profitability and how this reflects in cash in the bank. If you have not put together a cash flow summary using a spreadsheet, then it’s well worth doing this to understand if your cash position changes by month or season, or because of specific customers.