No business owner is free from worry about cash flow. According to a Skynova analysis of CB Insights data, 44 percent of startups fail because of cash flow problems. Additionally, according to an often-cited U.S. Bank study, a whopping 82 percent of small and medium-sized businesses fail for the same reason. Whatever line of business you’re in, you must ensure you sell enough of your products and services to make a profit and get your customers to pay you quickly.
We’ll highlight 12 ways to increase cash flow for your small business, allowing you to grow your venture, stay competitive and boost investor and supplier confidence.
How to increase cash flow
Increasing cash flow can be surprisingly straightforward. If you can find an extra 10 minutes in your working day to carry out the following steps, you’ll be able to address the cash flow issues that cause other businesses so many problems.
1. Incentivize customers to pay you promptly.
In a perfect world, customers pay you in cash on the spot. In the real world, getting paid can take a while, putting pressure on cash flow. However, small business owners don’t have to sit idly by waiting for payments. They can improve their accounts receivable (AR) process by offering customers early-payment discounts to incentivize them to pay their bills sooner. Offering easy payment options in your invoices is also helpful.
Before you choose this option, make sure you can afford it. You don’t want the discount to hurt your profit margin.
2. Send invoices immediately.
Small business owners wear many hats. One minute, they can be selling a product, the next, billing customers and the next, managing employees. Juggling everything is a challenge. Invoicing can fall by the wayside, depleting cash flow.
The bottom line is that the longer it takes to create an invoice and send it, the longer it will take for you to get paid. Avoid delayed payments by sending an invoice immediately after making a sale or completing a service. Many excellent accounting software solutions automate invoicing, helping you get paid faster and more reliably. For example, our FreshBooks review explains this platform’s instant invoicing feature that can help you get paid promptly.
Did You Know?
The best accounting software platforms let you add a "Pay Now By Card" option to invoices to encourage fast payments. They also let you set up recurring payments from customers on subscriptions.
3. Raise prices.
The cost of buying products, hiring workers, renting premises and more increases every year. If you keep your prices the same year after year, your profit margin will shrink and your cash flow will suffer.
While pricing services and products can be tricky, try not to get stuck in a race to the bottom. If possible, increase your prices reasonably to accommodate your rising costs while staying competitive. If you’re upfront and honest about why you’re raising prices and by how much, you should be able to keep your customers.
4. Streamline inventory management.
Proper inventory management is essential for preserving cash flow. Without it, you may order too much or too little. One way to streamline inventory management is to integrate it with your point-of-sale (POS) system. Many of the best POS software offers inventory features and integrations. You can often set alerts when inventory gets low and automatically reorder items.
You could also consider cashing in on your excess inventory to gain a capital infusion while freeing up space.
Check out our review of Lightspeed to learn about how this POS platform lets you track inventory across multiple locations, place orders and manage vendors.
5. Source additional suppliers.
Sourcing everything from one supplier or a restricted range of vendors can mean you get inventory faster, perhaps at a discount. However, the supplier might go bust, causing you significant disruption.
Investigate new suppliers periodically. You may come across more cost-effective options and a more comprehensive range of products. If you find a new supplier, tell your existing supplier and see if it will compete for your business.
6. Consolidate your debt.
Cash flow management can be particularly challenging when you’re servicing high levels of debt, such as high-interest credit cards. Consider business debt consolidation to improve cash flow while still paying down what you owe. You’ll have one monthly bill at a lower interest rate. Many of the best business loan and financing options offer term loans you can use to consolidate debt and get yourself on sounder financial footing.
7. Manage your accounts payable (AP) process.
Few things hurt cash flow more than not staying on top of yourAPand AR. We’ve already discussed invoicing immediately and incentivizing customers to pay you promptly. However, you must also be smart about paying what you owe.
First, get a clear understanding of how much money is coming in and going out. Track your invoices so you know what you owe and when it’s due — avoiding interest and late payments is crucial. When possible, negotiate better terms with your vendors and take advantage of early payment discounts to improve cash flow.
Tip
A systematic AP reporting process can help you monitor supplier payments and keep your financial records in order.
8. Try crowdfunding.
Crowdfunding platforms offer business owners a way to pitch their ideas to numerous small-dollar investors. If you need a capital infusion and have exciting ventures on the horizon, create a profile and build a campaign showcasing your concept to potential investors.
9. Use invoice factoring or short-term loans.
By selling your AR to an invoice factoring company, you could be paid up to 90 percent of the value of an invoice within 24 hours of issuing it. You won’t have to wait 30, 60 or 90 days to receive a customer’s payment. Remember that factoring companies base their funding decisions on your customers’ creditworthiness. The better your credit score, the lower the interest rate you’ll pay.
Keep the following information in mind if you’re considering using invoice factoring:
- The work you’re invoicing for must be complete.
- There must be no dispute or disagreement around the invoice.
- You can only sell business-to-business invoices.
- Invoice factoring companies take a small fee, similar to a credit card processing fee.
- You get the balance of your invoice when the customer pays.
Did You Know?
Credit card receivables financing, sometimes known as a merchant cash advance, is another way to boost cash flow. You essentially borrow against future expected credit and debit card sales and pay a daily percentage until the balance is paid.
10. Ask for a deposit or upfront payment.
The idea of asking for a deposit or upfront payment makes many business owners and freelancers uncomfortable. However, it shouldn’t. You’re a professional who is providing something of value and committing time and resources to a client.
If you must buy inventory or expertise to fulfill a contract, determine the cost and ask for a deposit close to that amount to protect your cash flow. Consider spelling out your payment terms and project completion dates to reassure the customer.
11. Charge interest on late invoices.
Some states have laws that allow you to charge interest and late fees on overdue invoices, subject to a maximum. While this is far from an ideal or especially profitable solution, it may deter some customers who regularly pay you late.
12. Understand your cash flow statements.
Cash flow statements can help you understand how well you’re doing at collecting money from clients and paying your bills and can help you identify ways to reduce expenses.
When preparing a cash flow statement, you’ll monitor several cash flow entries carefully, including the following:
- Opening balance
- Receipts from customers
- Payments to suppliers
- Operational income
- Taxes paid
- Interests earned
- Salaries and wages
Why it’s important to increase and maintain business cash flow
Managing cash flow is a vital component of running a successful company. When you increase your cash flow, you bring your business the following benefits:
- Gives you money to grow: An improved cash flow situation can help you open a new location or expand your business to a new area. A healthy cushion may mean you don’t need bank funding or can get by with a smaller loan. A cash flow cushion also gives you room to experiment and make mistakes because — as many investors will tell you — expansion always costs more and takes longer than you budget for.
- Gives you better supplier relationships: Your suppliers dislike late payers as much as you do. With increased cash flow, you can settle your accounts with suppliers on time and keep supply chain disruptions at bay.
- Makes you more competitive: Companies with strong cash flows have the available funds for bigger marketing campaigns and more in-depth research and development, giving them an edge over their competitors.
- Boosts investor and lender confidence: A healthy cash flow is helpful if you want to apply for a business loan or persuade investors to back you. Banks and investors will see that your business is well-managed and has the systems and cash flow in place to repay their investment.
Donna Fuscaldo contributed to this article.
