Cash flow management is critical for businesses of all shapes and sizes. As a business owner, you know that cash flow is much more complicated than a business just being successful or failing. It’s possible for a growing, successful business to have serious cash flow problems that can threaten the future of your company.
Cash flow is the cycle of accessible money coming in and out of a business.
Problems with cash flow may arise when bills and other operating expenses are due but invoices and future profits are still outstanding. Business Cash flow can also be affected by cyclical or seasonal fluctuations in profits, unexpected expenses, and opportunities for investment or growth. Improving your cash flow to prepare for these events as a business can make a huge difference in your bottom line.
Divvy is passionate about helping businesses spend smarter, so today we’re sharing how to increase cash flow to your business in 11 steps.
11 tips for improving cash flow to your business
1. Credit check your customers
Waiting around for a late payment is a common cause of monthly cash flow bottlenecks and negative cash flow. Maybe you could afford to be more flexible about payment schedules when you were a smaller, newer company, but as you grow and need better access to business capital you may discover that some customers aren’t as reliable as others. You can counter this in a few ways.
- Perform credit checks for customers so you can anticipate late or missed payments
- Adjust interest rates according to business credit scores, so late or missed payments are balanced by higher interest rates
- Shorten the grace period for late payments–for example instead of giving 60 days to complete an invoice, shorten the deadline to 30 days.
- Increase penalties for overdue payments
2. Implement early payment incentive
Of course late payments are penalized, but have you considered incentivizing early payments? You may consider offering a discount for invoices that are paid in full ahead of schedule. For example, you might offer a 5% discount if invoices are paid within one week of the service date. Other rewards for loyal, early payment customers could include discounts, bonuses, promotional items, or recognition of some type. Not only will early and reliable payments benefit your positive cash flow, it will also develop a strong relationship of trust and appreciation between customers and the small business owner.
3. Use better invoices
Another major issue with cash flow is the huge gap between the service or sale and the payment. You can identify these issues by carefully reviewing a cash flow statement, cash flow forecast, or cash flow analysis each month. Sending and receiving payment for invoices can be a slow process that is dramatically stalling your cash flow. Look at your invoice process and locate the sticking points. How quickly do you send invoices? Are your invoices clear and of high quality? Are they digital or posted by mail? How do you accept payments?
There are so many ways to improve your invoicing process. The best practice is to expedite the invoice process by sending invoices immediately upon completion of the services or sale. Create clear invoices with readily accessible information (such as due date, amount due, ways to pay, etc.) and institute a workflow for following up on outstanding invoices. For some small businesses and customers, invoice factoring might be a great option for your business’s cash flow.
4. Institute electronic bill pay
Managing all the bills and payments necessary for your business is not only a huge investment of time, but it can also hurt your cash inflow. Making late payments can incur fees and hurt your business credit score. Paying too early or paying bills out of order can also leave you with less cash than you need.
We recommend switching to electronic bill pay to ensure intentional direction of your healthy cash flow. You can automate your payments, so you never miss a deadline. You can schedule specific days for bills to be paid, so cash is never leaving your account too early or late.
5. Play with prices
Prices shouldn’t be a set-it-and-forget-it element of your business. To improve problematic cash flow issues, you should experiment with your current inventory, offerings, and prices. You may consider raising prices on your more popular and lucrative goods or services. Alternatively, you may want to drop the price on inventory that isn’t being used so that you can move it along and get some cash coming in.
6. Consider a business line of credit
If a cash flow problem is proving to be a constant or recurring issue, it may be time to consider different lines of business credit. Seasonal businesses, or those with irregular, large invoices might need access to credit for payroll, inventory, and other operating expenses during slower months.
Business credit cards are a fast and easy way to provide access to immediate funds. You can use business credit cards to improve your credit score, and you can take advantage of the grace period to pay bills that are due before your profits come in. Corporate cards make it easy for any employee to pay for goods or services when your business needs them, without having to wait for funds or lengthy approval processes.
7. Manage your expenses
When was the last time you truly itemized your budgets? Do you know exactly how much your sales team spent last month? Did you have a whole stack of unexpected reimbursements because employees made large purchases (AKA cash outflow) without prior approval? Businesses can find themselves suddenly in the red despite great profits and careful bookkeeping when they’re using dead data, and you can’t succeed at managing cash flow when you don’t even know where it is flowing out. You need live expense data for better cash flow projection.
8. Optimize reward programs
Does your business credit card offer rewards? Cash back? Redeemable points? You may consider shopping around for business credit that rewards you for spending. Take advantage of early or paid-in-full discounts or rewards, as they can make a difference in your total expenses.
Additionally, your business should be taking advantage of high-yield savings accounts. Even if you need some degree of liquidity, a high interest savings account can increase your cash significantly over time.
9. Negotiate prices & payment terms
Far too often businesses discover that they’ve been overpaying for goods or services they need to keep their business afloat. Cash flow problems can lead you to inspect your operating expenses and figure out where you’re spending too much. Consider calling your vendors and negotiating prices or payment terms. Perhaps you can lengthen the time frame for paying an invoice, or pay in installments. Small business owners can team up to make purchases in bulk for discounts or higher volume. Get creative about the way you direct your outgoing funds and you can find some instant relief in your cash flow.
10. Invest in a marketing strategy
Spending money when you have poor cash flow may seem counterintuitive, but marketing is an investment that, done well, can pay for itself and increase cash flow permanently. If you are unhappy with your current marketing approach, you can find ways to streamline and improve. Create a new marketing strategy that aligns with your business needs and abilities. You may focus on untapped markets or on better educating your leads to improve conversions.
11. Consult your accountant
Finally, we always recommend that you consult with your accountant and other finance professionals in your company. Together you can discuss the patterns in your cash flow and discuss ways to improve your access to liquid capital. Your accountant may have insights and suggestions that can transform your business and bring you into the black. The advice of a finance professional is always recommended when you want to take steps to improve your cash flow.
Better budgets, better cash flow
You can improve your cash flow by breathing life into your budgets, making them live, to-the-second representations of every penny spent. Divvy allows you to set specific budgets for each expense or department as needed, then release only the amount of cash they’re allowed to spend. No longer will you live in the gray area of floating payments and outstanding invoices that keep you up at night, or get hit with expensive reimbursements a month after the fact. You can direct your cash flow to where it’s needed most.
Divvy is your sharpest tool for creating fast and visible control over your business finances to help you spend smarter. Get started today for better cash flow and controlled spending.