Eight out of 10 businesses fail within the first 18 months, and 96% of businesses fail within ten years. A company may have all the revenue in the world, but without the ability to generate and maintain cash, it will likely fail. This article provides proven methods for increasing business cash flow.
By now you may be all too familiar with the age-old saying, “Cash is king.” This saying is often used to explain the failure of businesses. *Eight out of 10 businesses fail within the first 18 months and 96 percent of businesses fail within ten years.
Why do such a high percentage of businesses fail? More often than not, businesses fail due to cash flow issues. Without the proper amount of money on hand, companies can run into serious trouble and even be forced into bankruptcy. In the business world, cash is king.
Companies need cash on hand for countless reasons, such as: recruitment, payroll, investing in new infrastructure, unplanned or unexpected expenses, and more. Even if you are anticipating large profits in the coming months, if you don’t have enough cash coming in to cover your expenses during that time, you may not get a chance to realize those profits.
That’s why it’s important for all businesses and organizations to develop the right strategies to maintain a healthy and speedy cash flow. The following industry secrets tips can help increase your cash flow and likelihood for success:
Speed Up Receipt of Cash
Any steps you can take to shorten your receivables process will increase your cash flow. There are several ways to do this.
- Offer a small discount to customers who pay their bills early.
- Charge a penalty to those who pay late.
- Monitor your receivables on a weekly or bi-weekly basis and follow-up with late payers when appropriate.
- Expedite the process for sending out invoices immediately after the delivery of goods or services.
- Revise your payment terms. If your current terms are 60 days, then change them to 45 days or 30 days.
- Offer credit. Be careful when extending credit and always do a financial check on new customers before offering them credit. Also, check their business references.
Finally, you can consider using an automated tool to handle your payment processing. Train your team to understand how to use such a tool, and see the following improvements:
- Automatic discounts and penalties for early and late payments
- Automatic messages for late payments, or reminders when a payment due date is close
- Ability to mark orders as delivered in your tool, and have invoices immediately sent
- Automated credit checks, increases, and applications for potential customers
Use Your Business Credit Card
A business card allows you to defer payments while making sure your debts are covered. While you must stay on top of timely payments for the card, you can responsibly handle some debt, yet ensure that you have adequate cash in the bank.
Tips for using your business card:
- Consider using your business credit card to pay suppliers and make purchases.
- Learn about your card’s grace period, and take advantage of it – you may have up to 21 days after receiving your statement to make the payment.
- Get a card with cash-back features or rewards.
- Speak to your business banker about the card that’s right for you.
Known Where You Are Spending and Why
Consider adopting a spend and expense management platform that provides you with full visibility and control of spending and expenditures. Some platforms allow you to set budgets and monitor your spend in real-time while also suggesting better ways to spend your money.
- Evaluate spend and expense management platforms to take advantage of automated solutions that can support better spend management to increase cash flow.
- Choose a platform that allows you to receive notifications when you are nearing budget caps, or when others add expenses.
- Add the platform’s app to your smartphone, and check budgets in real-time before making new purchases.
- Make sure other members of your team are using the app to control their spending.
- Regularly assess your budgets and watch for areas to cut back cash spending.
Your accountant can suggest software that will help you manage spend and expenses.
Encourage Use of Payment Cards
Depending on the nature of your business, you may want to consider accepting credit card and debit card payments. This allows you to receive next-day value for your sales and services, without the need to handle checks and make deposits. Whether you serve customers over the counter or online, a merchant services solution makes it easy to process payment cards.
Compare costs and features when investigating a merchant services solution.
Anticipate the “added” cost of accepting credit card payments and factor its potential impact on your pricing and desired profit margins.
Consider only taking credit cards for payments, and keeping a card on file to charge invoices to upon delivery; this will streamline invoices, increase cash flow, and cut out returned checks.
Work With Your Accountant
Your accountant should be a trusted business advisor. The services of your accountant should be an investment rather than an expense. Your accountant can review cash flow projections and results, provide insights into areas that you may have overlooked, and help you anticipate and plan for cash flow problems.
Tips for working with your accountant in regards to cash flow:
- If you don’t trust your accountant as a business advisor, get a different one.
- Ask for suggestions on improving cash flow.
- Bring all of your business information and data to the accountant to present a full view of what you are working with.
- Consult with them multiple times a year to stay on track and get suggestions for improvements.
Offer Discounts for Quick or Early Payment
Develop a discount program to encourage faster payments this helps by, collecting cash owed to you as quickly as possible, increasing your cash on hand.
Typical payment terms allow a 30-day period for remittance after the receipt of an invoice, with a 2% discount if paid within the first 10-days. You can offer more, less, or no discount for payment, depending on your needs and your customers past payment habits.
Tip: Remember, however, that your ability to institute a collections policy will depend upon your relative strength versus that of your customer. A major account might take an offered discount and still pay late.
Improve Your Marketing
Any improvements you can make to your business will ultimately lead to improved cash flow. Marketing, in particular, is a huge contributing factor to the health of your organization as it should continually generate new leads for your products and services.
Improving marketing reduces your cost-per-lead, increases the lifetime value of your customers and opens up untapped markets.
Are you having trouble fostering trust and gaining credibility with your clients? It may be time to implement a content marketing initiative that educates your leads, improves your conversions and elevates your company image.
Marketing is an investment, but one that should pay off in new accounts rather quickly, to pay for itself. Get assistance in choosing a marketing strategy for your company based on current markets, assets, skills, and budgets.
Analyze Your Cash Flow
Many businesses go through cyclical highs and lows. Clothing retailers, for example, typically have their best months in December, while schoolbook and uniform suppliers do well at the beginning of a school year.
A cash flow analysis can highlight the cycles in your business. This information can be used in many ways, such as timing your borrowing, arranging the right amount of staffing, and boosting your marketing efforts during lulls.
Tip: This is another area where your accountant’s assistance will help. They’ll provide analysis of your funds and market to give you realistic expectations, as well as suggestions for staying cash positive.
Deposit Cash Balances into Interest-Earning Accounts
Obviously, it’s important to keep money liquid. Interest-earning checking accounts are available at most banks today with a minimum balance requirement.
Since interest rates on these accounts are often below rates on savings accounts, certificates of deposit
(CDs), or money market accounts, keep the bulk of your funds in these higher-paying accounts.
Then, transfer necessary funds from higher-paying accounts to meet the minimum balance requirement in an interest-bearing checking account plus the total of the payments expected to come due that week or month.
Tip: Ask your customers to make direct payments to the higher-earning account for accounts receivable so that interest begins immediately. Additionally, talk to your accountant about these offers, they will know what banks are offering the best rates, and easiest accounts to use.
Schedule Payments on Long Contracts to Your Benefit
Some customers, due to their size or policies, will refuse to enter into contracts that require initial deposits. Rather than lose the business, negotiate payment terms and benchmarks that exceed or parallel your costs.
For example, a typical construction contract might allow a 15% payment when engineering is completed, an additional 25% upon delivery, and 50% of the contract amount at other progress benchmarks. The remaining 10% of the contract price is usually held by the buyer until final inspection and acceptance.
Get a Line of Credit
Having a line of credit in place to cover short-term needs and emergencies is a much more efficient way to manage your cash flow than trying to get a loan in a hurry.
Rates are competitive, you can draw from your line of credit when you need it, and you pay interest only on the amount borrowed. Arrange for a line of credit before you fall short, and use it when an emergency presents itself.
Tip: After using the line of credit, you can request occasional increases to have even more funds available for emergencies.
Use Longer Term Financing
Consider taking a loan to purchase a piece of equipment, car, or computer system instead of buying it outright with cash/savings. You’ll free up some cash that can be used to tide the business over when cash flow is tight.
Be sure to shop around for rates and payment terms that work best for you. For instance, during the summer and Christmas season, and tax season computers and other electronics are often on sale. If you can wait for these times, you’ll get better rates and prices.
Put Your Cash to Work
High-interest savings account for business allows you to earn a competitive rate of interest on your cash on hand, but the funds are accessible whenever you need them. You earn interest every day on each dollar saved and can withdraw the money whenever you need to.
Internet savings account are a great example of higher interest accounts; many are offering debit cards that give you immediate access to your funds, though you may have to keep certain minimums in the accounts.
Consider Subscription Sales
Another way to improve your cash flow is by offering deals on your products or services to customers who buy for a fixed period.
A subscription-based product such as a newsletter or magazine is a good example of how continuity sales work: you pay the publisher upfront for a one-year or two-year subscription; in return, you get a better deal on the cost of the newsletter.
Continuity sales can be made to work for almost anything. Your customers save money on a package of goods or services, and you get the cash upfront.
Depending on the amount of clients you have, it might be fruitful to collaborate with another business to offer a subscription program. By providing another company a percentage of your profits from the sale, they will present the sale to their buyers, while helping you increase cash sales.
Re-evaluate and Fine-Tune Product Pricing
Is your pricing optimized? Could you be selling for more? When was the last time you evaluated your pricing strategy and compared it to your business costs?
You may be concerned that your sales will suffer if you raise your price too much, and that is always a possibility. However, it’s best not to come to any preconceived conclusions without first testing to find out what the market can bare. This is especially important when running an ecommerce business, where you have the physical inventory you must buy first.
When you increase the price of your products, their perceived value also tends to rise. Customers who haven’t been taking advantage of your offerings may feel more inclined to make use of them, even if they require a larger investment at the outset.
Low Pricing Could Devalue Your Product
If your pricing is too affordable, you may not be taken seriously, and customers may wonder about your quality. But if your pricing is too expensive, you will lose some business to competitors. So, you have to recognize that the bewst margin sits in the happy middle. Find a price point that helps boost your cash flow while not resulting in lost sales.
To increase prices, start by assessing the market costs of your products. Next, choose a small number of goods or services to test, and begin raising prices.
Take the information from new sales and compare it to sales before the change, on just the products whose prices have increased. If sales increase, add more products to the test. If you see a decrease, watch the comparison for a longer amount of time, and make changes based on the results.
Invest in Your Business
Any steps you can take to build your business, such as training staff or boosting your marketing, can help improve cash flow. For instance, the new sales team will be an investment, but should quickly prove their value with increased cash flow.
Similarly, courses that teach sales, marketing, pricing, or other strategies should result in improved cash flows. However, please do your research first, to qualify any purchases you’ll be making.
Financial flexibility is important to every company, particularly when the future economic environment is unclear. Having cash on hand allows your business to be prepared for emergencies, take advantage of amazing bargains, or cover expenses when sales are less than forecasted.
Implementing the recommended cash flow strategies above can build up your bank balances, extend the number of strategic options available to you as a company, and reduce the likelihood that you will be forced to make desperate decisions.
We dug deep to create the world’s first free, fully-automated budgeting and expense management platform, and it gives you instantaneous visibility into company-wide spend. Born from loathing a truly broken process, Divvy turned that legitimate dislike into the catalyst to reinvent. Not even innovate: burn to the ground, salt the earth, and build something that works on new ground—from scratch.
Download the PDF version here:
©2017 Divvy, all rights reserved. Divvy is a registered trademark of DivvyPay.