21 Ways To Improve Cash Flow:
If cash flow is a problem for your business, trust me, you are not alone. Many growing businesses struggle with cash flow – having enough cash on hand to cover all of their expense. In fact, a growing business can cause a shortage of cash because you may have to hire more people, outlay more cash to get the project going, or purchase more inventory to fulfill a large order for example, all prior to getting paid from your customer. According to the SBA (Small Business Association), insufficient capital is one of the major reasons businesses fail.
Remember, you can have a profitable business but negative cash flow – just because you are selling, doesn’t mean you have the cash! There are many ways that you can improve cash flow, I have listed 21 different ideas so boost your cash flow below. Not all of them will work for everyone, but hopefully you can utilize some of the tips below to make sure you have enough cash on hand to keep your business going.
- Cash flow Forecasting: I put this in the number one spot because I personally feel that this is the most important. You need to monitor the ins-and-outs of your money so that you know ahead of time when there is going to be a problem and you can take the necessary steps to avoid the problem.
- Invoice Promptly: If you don’t invoice your customers, they are not going to pay you and the sooner you send them your invoice, the sooner it gets on the books to be paid. Many of the newer accounting software programs and add-ons out there, offer digital invoicing that will email your customer with the invoice. Some programs even allow payment by a click of a button on the invoice. Make it as easy as possible for your customers to pay you and you will get paid faster.
- Require a deposit or do progressive invoicing: If a customer places a large order or you have a large contract for services. Make it a requirement to get money up front to help with those expenses that will come with fulfilling the order. You can also do progressive invoicing – Maybe ½ up front, ¼ after 30 or 60 days, and then the balance on completion of the project.
- Do credit checks on your customers: You can check a business’ financial score and payment history with companies such as Dun & Bradstreet for example for as little as $61.99, which will give you Payment History, Industry Payment Benchmarks, and Credit Limit Recommendations. Money well spent if you ask me. I am sure that there are other sites out there that do the same thing and maybe for less, but I personally like D&B.
- Set Credit Limits and monitor: If you used D&B as stated above, they give you a suggested credit limit. Stick to it and monitor their payment history. If they seem to have issues paying, then you may want to consider lowering their credit limit.
- Lower your payment terms: If your payment terms are net 30 for example, an acceptable DSO (Days sales outstanding) is 40-45 days. Personally that is unacceptable to me, if my terms are net 30, I want the money in 30 days. If cash flow is an issue, keep your terms low like “Due Upon Receipt” or Net 10.
- Chase your Receivables and BE CONSISTENT: Many of the digital programs out there such as Bill.com, for example, send out a friendly email to your customers reminding them that your invoice is coming due. In the very least you should be contacting each of your customers if you have not received payment from them by the end of the payment terms. Then follow up with them weekly until payment is received – remember THE SQUEAKY WHEEL GETS THE GREASE! They are going to pay you faster if they know that you are going to call them, so they don’t have to talk to you about it. Also don’t be afraid to charge late fees.
- Purchase inventory JIT: Instead of carrying a lot of inventory, which is just money sitting on the shelf, try to purchase only the items that you need to have on hand to fulfill orders – JIT = Just in Time.
- Sell non-moving inventory: If you have inventory that is just sitting around that is not selling. Consider having a sale for those items or put them out on EBay. A little money is better than nothing!
- Consider financing or leasing your fixed assets: Rather than shelling out all that money at one time buying equipment, try leasing. In this way you pay a little each month rather than shorting yourself by paying one big chunk.
- Negotiate payment terms with your suppliers: If you have payment terms with your customers of 30 days, try to get at least that with your vendors so hopefully you are getting the money in from the customer as the bill comes due. Or better yet maybe do net 10 or net 15 with your customers and net 30 with your vendors so you will be sure to have the money prior to the bill coming due!
- Pay commissions to your sales staff AFTER you receive the money from your customer: The sales staff has the relationship with the customer usually, so make it a part of their requirements to make sure they are very clear on payment terms with the customer and have them chase them for payment. If you let them know that you will only pay them when and if you get paid, they have skin in the game and they will be more than happy to assist with collecting from their customers so that they can get paid!
- Don’t put all your eggs in one basket: Try to diversify your products and services, especially if you sell something that is seasonal to help you get though the slow times.
- Sell Assets you are not using: If there are fixed assets collecting dust, sell them to get some needed cash in the door.
- Control your costs/expenses: Go through your monthly expenses to see if there are items that you really do not need. Also it is a good idea to leave that business debit card in your desk drawer, you will be surprised at how much you will save!
- Pay mileage instead of purchasing company vehicles: This will save you on maintenance and insurance costs, or consider setting a car allowance so that you know each month how much you are spending and can better budget your cash.
- Minimize the draws of cash that you personally take out of the business: Back in the day, I worked for a company that had cash flow issues but that did not seem to stop the owner from taking cash out, even though he was receiving a paycheck. Needless to say, that company is out of business now. So if money is tight in the business, I would reconsider taking draws of cash out of the company.
- Pay your bills on time and get a good credit rating: If you have a good credit rating, you are able to negotiate terms as well as you are able to get a loan if needed.
- Set up a line of credit with your bank: This is a great way to have emergency cash on hand and you can usually get great rates if your credit is good.
- Get a loan: Hopefully you have been monitoring your cash flow so you know well in advance that you are coming on a cash shortage before it arrives. Here is a great article on Navigating an SBA Loan.
- Factor your receivables: I put this last because I feel that this is a last resort. When you factor your receivables a company purchases your receivables. The good thing about this is that you don’t have to wait 30-60 days to get your money, however the bad thing about this is there are fees associated with this. I believe they charge a percentage based on how much it is and/or how many days outstanding the invoice is. Hopefully you too use this as a last resort because you have worked hard for you money and you should not just give it away.
I hope that you have found this list of items useful and that you can utilize some of the ways to increase your business’s cash flow. If you have any other tips that you would like to share, please post them in the comment section below. Together, we can all help each other!
If you need help with creating your Cash Flow Forecasting or any of the other items listed here, Dailey Bookkeeping Services would love to help you! The owner, Jacqueline Dailey is a Certified Public Bookkeeper, a Certified QuickBooks and QuickBooks Online ProAdvisor, a Sleeter Group Certified QuickBooks Consultant and a Xero Certified Advisor. We work remotely so we can work with any company located in the U.S. If we can help you with this process or provide you with custom reporting, please give us a call. If we cannot help you, we will refer you to someone who can!