Cash flow is the lifeblood of your business. If you’re not managing it properly, you could find yourself struggling to stay afloat. Fortunately, there are several ways to improve cash flow, and they don’t necessarily revolve around increasing your sales.
Here’s how to improve your cash flow using six methods.
Table of Contents
1. Cut Unnecessary Spending
One of the most obvious methods to improve cash flow is to cut back on unnecessary spending. Paring down your business expenses can be tricky, especially if you already feel like you’re down to the bare bones. However, you can likely negotiate some of your core expenses, like rent and supplies, to try and lower these costs.
Other costs to examine include:
- Investments in new equipment
- Non-essential maintenance
- Other discretionary spending
Take a careful look at your expenses and evaluate your costs on an item-by-item basis. Then, reduce or eliminate any costs that aren’t absolutely necessary for the running of your business.
2. Study Your Cash Flow Patterns
Cash flow ebbs and flows, but most businesses have cash flow patterns. Study yours. You may find that you tend to run into cash flow problems at certain times of the month or year. With this knowledge, you can better prepare for these situations.
Understanding your cash flow patterns can also help you gauge the financial efficiency of your business.
3. Maintain A Cash Flow Forecast
If you’re looking for effective ways to improve cash flow for small businesses, then you need to start creating cash flow forecasts. Forecasting can help you predict when your business may run out of cash so that you can make decisions now to prevent that from happening.
Cash flow forecasting allows you to stay one step ahead and remain financially stable even through slow periods.
While you can create forecasts manually, software can save you time and automate calculations to minimize the risk of errors. Software can connect with your accounting software to automatically populate your forecasts with the most up-to-date data. For example, you can use a QuickBooks app for desktop to build monthly cash flow forecasts for your business using accurate, up-to-date data.
4. Give Customers Incentives and Penalties
Many businesses run into cash flow issues when customers fail to make payments in a timely manner. To help mitigate this risk, give customers an incentive to pay on time and ensure they understand that there will be penalties for late payments.
For example, you could:
- Offer discounts to customers who pay early
- Charge a late fee when customers fail to pay on time
Having clear payment terms and policies is important. Be transparent about your pricing terms and communicate this information to your customers.
5. Negotiate Quick Payment Terms
Take a look at the agreements you have with vendors and suppliers. What are the current payment terms? If you have quick payment terms (30 days or sooner), consider negotiating better terms.
For example, instead of 30-day payment terms, ask for 60 days. This will help keep more money in your pocket and may help with cash flow issues at the end of the month. During slow periods, these extended payment terms can help you stay afloat.
Before negotiating terms, consider your relationship with the supplier or vendor. Do you have an established relationship? You’re far more likely to be successful when negotiating terms if you’ve been working with the vendor for years as opposed to just a few months. If you have newly established relationships, consider only negotiating terms with vendors you’ve been dealing with for a while.
6. Consider Invoice Factoring
If you’re running into cash flow issues and you have unpaid invoices, invoice factoring can help you stay afloat.
Invoice factoring is not a loan. You simply sell your invoice at a discounted rate to a factoring company in exchange for a lump sum of cash. The factoring company then owns the invoice and will collect the funds when the customer pays.
Invoice factoring can help ensure that you have the cash you need to keep operations going when your business runs into a crisis situation.
Virtually every business will run into cash flow problems at some point. These six methods can help you overcome these issues and better prepare for the future to prevent cash flow issues.
