The Need for Strategy
Most small business owners in America understand that cash flow is important. Try this experiment: next time you see a couple of kids at a neighborhood lemonade stand, ask them if they think it would be helpful for their business to have more regular payments coming in and for their lemonade to be even cheaper to manufacture. Even those young entrepreneurs would immediately tell you that they wanted to improve their cash flow, even if they wouldn’t understand the proper term for it.
But it’s not enough to simply know that something matters—you also need to know how to take decisive action to positively impact the things that you believe matter. Having strategies in place to manage your cash flow is essential because of the multiple factors that can strangle a business’s cash flow. For example, a significant portion of small business invoices are paid after the deadline. This frustrating fact forces the average small business owner to spend hours each week following up on outstanding payments. The situation is dire enough that nearly 70% of small business owners report that they lose sleep due to stress from cash flow issues.
“Think of cash flow as the blood running through the arteries of your small business,” explains Small Biz Trends. “You use it to do those important things that keep everything moving like buying stock, covering expenses, and paying staff… Basically, this is one of the best bellwethers for your small business. It shows the money that your small business has in the pot after paying out all the different debts and draws on your money. Cash flow gives you a good idea if you’re in a position to expand.”
There’s plenty of volatility associated with cash flow, as you never know who’s going to pay you on time and who’s going to ghost you like a frat-bro boyfriend. Additionally, you have no control over the times when supply chain issues or other external factors cause your supply costs to increase dramatically.
What can you do? Put initiatives in place to give you the best chance for stability. Because each successful strategy can have a substantial impact on your bottom line.
Proven Tips for Improving Your Cash Flow
Your business has its own strengths and limitations, so it’s unlikely that all of these tips will be relevant. The important thing to do is look for actionable ways to begin improving your cash flow. With no further ado, here are 9 tips to consider:
1. Get Some Cash Flow Management Software
When it comes to your business’s cash, who wouldn’t want accuracy and speed? Software solutions offer both of these benefits, helping you to keep tabs on where you currently stand so that you can make better plans for where you want to go.
2. Negotiate Your Costs
If you’ve developed good working relationships with your suppliers, don’t hesitate to discuss options with them for better rates. Perhaps they’ll lower the prices for you on the front end, or they might offer discounts for paying your bills early.
Even if you don’t have a great relationship with a supplier, let them know that you’re interested in talking to other suppliers to lock down the best price. Simply knowing that you’re shopping around will often spur them to offer you better prices.
3. Know When Enough Is Enough
Speaking of business relationships, you probably have customers and clients who continually avoid paying their bills. Perhaps they give you compelling sob stories or maybe they avoid you altogether. But there are times you’ll need to review a customer’s track record and then make the call to stop doing business with them.
4. Use Autopay and Recurring Payments
What’s better than a customer who promptly pays their invoices? A customer who doesn’t even require you to go through the full invoicing process! Consider setting up your customers with autopay or recurring payments as a way to make everyone’s lives easier.
5. Provide Early Bird Discounts
It might seem a little counterintuitive that accepting less money from a customer is a good way to increase your cash flow—but the faster you can get paid, the more positive your flow will be.
Many small businesses offer discounts to customers that pay their bills before the deadline. Not only does this incentive save customers money—it also helps them to get bills off their own books, making the discount beneficial for everyone involved.
6. Make Your Bills as Accurate as Possible:
There are times when business owners might be tempted to overbill a customer as a way to increase their cash flow. But this approach does more harm than good, as you will be forced to recalibrate things on the back end. In many cases, business relationships can be damaged.
Avoid these issues by ensuring your bills are precise. Overbilling and underbilling only lead to additional work down the road, making it harder to accurately forecast your cash flow.
7. Bulk Up Your Orders
You can often save money when you order in bulk from suppliers. This isn’t a feasible approach for all your orders, but look for specific areas where you could make larger orders at a more dispersed cadence throughout the year—you’ll be surprised how much you can save.
Another way to harness the power of bulk pricing: join up with other small businesses in your area. These kinds of cooperatives allow you to combine your resources in order to score substantial discounts on supplies that everybody already needs.
8. Get Your Inventory Clicking
Evaluate your inventory to discover the products that aren’t selling like they ought to. When you have inventory lingering on shelves, it might be time to kiss those products goodbye.
This is a delicate process that will require clear data to back up your decision. But you can often boost your cash flow by streamlining your inventory and leveraging what’s performing the best.
9. Raise Your Prices
Speaking of your top-performing products, you should consider a price adjustment. There’s always a chance that customers will balk at the higher price tag and sales will slow. But the beauty of price changes is that they can always be reversed.
Review your sales data to find possible candidates for a price increase—then proceed with caution. Many small business owners have used this strategy to boost their cash flow while still maintaining customer loyalty.
Perhaps there is 1 strategy on this list that really hits home to you, or you might want to tackle a few right off the bat. Be careful not to bite off more than you can chew, however, as this situation can leave you feeling overwhelmed.
Refine Your Invoicing, Refine Your Cash Flow
Invoicing is an aspect of cash flow that nearly every small business can improve upon. Yes, there are some unscrupulous customers who may enter into transactions with no intent of ever making payment to you. But most late payers are good people who either forget to follow through due to their massive entrepreneurial workload or are simply trying to buy some time due to their own cash flow issues.
You can probably relate to these challenges, as you may have personally struggled with paying invoices from time to time. So it’s important to do everything in your power to make it easy and safe for your customers to pay on time—or, better yet, early. The small business ecosystem works best when everyone has empathy for each other and puts plans in place to make life better for the other.
Here are some specific recommendations for making your invoicing processes easier for yourself and others:
Get With the System
Many small businesses still rely on archaic processes for their invoicing, possibly because they feel that it’s unwise to change an essential business function that’s been in place for decades.
While it’s admirable that entrepreneurs can be so loyal to their old methods for invoicing, you have to upgrade to an automated system. There’s simply no room for argument here.
Not only will an automated system save you untold hours each month, but it’s practically guaranteed to reduce errors. Who wouldn’t want that for their business?
Become More Accepting
Any business that wants to succeed in our modern world must accept credit card payments. Earlier research shows that 75% of Americans use plastic for payments. And in the post-COVID era, contactless payments are going to become even more crucial.
Ensure that your invoices allow for the most convenient payment methods possible. This certainly includes credit cards, but depending on your business model, it could also entail online payment services like PayPal.
Not only do credit cards and electronic payment methods make life easier for your customers—they can also deliver the money to you faster. Remember, cash flow isn’t about how much people owe you: it’s how much they pay you and when they do it. So when you get faster payments, you’ll improve your cash flow right away.
Be an Explainer
You might think that your invoices are quite logical and easy to understand—but that probably has something to do with the fact that you’re the person who created them. Customers receive all manner of invoices from other businesses, and it can be hard to keep the various terms and instructions straight.
You can improve this situation by clearly outlining all the important details in the invoice itself. This is especially true for weighty matters such as the consequences of late payments.
Even the finest business owner is capable of missing a deadline—this is why reminders are essential. But rather than leaving sticky note messages around your office to remind you to remind others about their payments, simply program these alerts into your invoicing software. It only takes a few minutes to add such reminders, and it can potentially save you many hours of work each month.
Talk it Out
When problems arise, don’t hesitate to reach out to your invoice recipients. Assume positive intent in these conversations, as there’s often a harmless reason for the missed deadline.
You’ll find that a quick chat can remedy most situations and help you to maintain a healthy working relationship.
Focus on Your Cash Flow Statement
It’s hard to know where improvements are needed in your cash flow management unless you have a clear picture of the situation. Imagine if you had a 7-year-old son and his teacher were to send you an email stating that your child’s behavior in class was unacceptable. You then follow up with the teacher to find out exactly what the issues are, but the teacher merely responds by saying that your son is “causing problems.” This would be extremely frustrating because you couldn’t take actionable steps toward improving your son’s behavior until you knew where the problems existed.
Your business’s cash flow can sometimes mirror this scenario. You might be keenly aware that there are issues because you’ll have difficulty meeting your financial obligations due to a lack of cash on hand. But it takes detailed analysis to understand where the problems lie and anticipate what the coming months might bring.
Make sure to track your financial health using a cash flow statement. This document accounts for all money entering and leaving your business, leaving you with clarity regarding how much money will be available. As you analyze each month’s statement, trends will emerge. This data then helps you to forecast your future cash flow.
If you seek financing for your business, you’ll find that most lenders will want to review your cash flow statement. This makes perfect sense, as they’ll be able to get a good idea of your ability to make monthly payments based on how much cash you have available each month.
Of course, cash flow statements are only 1 of the resources in your toolkit. You should always use them in conjunction with a balance sheet and income statement in order to get a fuller scope of your finances.
By combining your financial tracking with impactful strategies, such as improved invoicing and reduced costs, you’ll start seeing better cash flow for your business. Each new strategy helps to move the needle, and your financial management will enable you to identify new ways to maximize these improvements.