Four Tips to Improve Small Business Cash Flow

man emptying piggy bank to represent need to improve small business cash flow

Regardless of the size of your business or the industry you work in, cash flow rules in the business universe. A stable, healthy cash balance is one of the most powerful components in keeping your organization’s operations moving in the right direction. However cash generated from sales doesn’t always flow into business coffers at the ideal time, which can stall initiatives to scale your business or simply prevent you from keeping up with operating costs. When timing is not quite right, the outflow of cash may be too aggressive for the cash coming in. In these cases, businesses may need to secure additional financing, tap into savings, sell off business assets or—worst case scenario—stall operations. But there are preventative measures that can significantly improve small business cash flow.

The Atradius Payment Practices Barometer survey reported that one third of business owners report cash flow as their biggest challenge. This is due in part to the unfortunate truth that nearly 33% of invoices are not paid on time, and the funds set aside for these cash flow burdens are typically not enough to cover a company’s daily expenses. Fret not, though—closing up shop due to lack of funds is not your company’s only remedy. Follow our step by step list of:

Four Tips to Improve Small Business Cash Flow

Step 1) Get in the Know

When it comes to cash, knowledge truly does equate to power. Cash-flow management begins with knowing when money is coming in, when it is paid out, and accurately predicting any gaps along the way. If your company operates with a steady cash cycle, managing the timing of these flows might be relatively simple. However, businesses with seasonal peaks and troughs in cash flow need to understand and plan for times when a shortage may rear its ugly head. Businesses should start by analyzing customer payment histories, knowing what expenses are coming up, and—in case of emergency—understanding the degree to which vendors who need to be paid can wait. Each of these are important factors in projecting accurate cash flows and developing a plan for successfully navigating any shortfalls. If you need help, check out our webinar on creating an accurate forecast

Step 2) Speed up inflows

Once cash flow projections are complete, businesses can take steps to improve the amount of cash coming in by promoting practices that to ensure speedier payment. Rarely do sales immediately equate to cash in hand, but smart management of receivables certainly helps expedite the process. Some tips for creating faster cash inflows include:

  • Require a deposit from customers when orders are placed
  • Provide a discount for customers who pay quickly
  • Manage the invoice process so that they are issued in a timely fashion
  • Unload outdated inventory for cash
  • Track outstanding invoices regularly, and implement cash on delivery policies for historically slow-paying customers
Step 3) Slow down outflows

The majority of businesses have a solid understanding of what bills are due and when, but due dates rarely sync with cash coming in. In addition to expediting inflows, improving cash flow management involves slowing down outlays to fit your specific business’ needs. This can be accomplished by implementing the following tactics:

  • Pay close attention to credit payment terms and take full advantage of extended due dates when necessary
  • Understand discounts offered for early repayment to vendors and only expedite payment when it fits with your upcoming sales/expenditures
  • Prioritize favorable payment terms when selecting vendors
  • Use electronic funds transfers to pay bills on the due date. Your suppliers or vendors will get paid on time and your business will have the cash on hand for a few extra days
  • Communicate with suppliers and vendors regularly to build a strong relationship and inform them of any potentially late payments as early as possible
Step 4) Establish a backup plan

Accelerating incoming payments and slowing down outgoing payments are both indispensable tactics to help intelligently manage and improve small business cash flow. Still, most companies are faced with shortfalls every now and then. It is equally beneficial to have a plan in place when forecasts are less accurate than real-time cash flow needs.

Businesses should set up a contingency plan in anticipation of cash flow shortages. Setting up a credit account can keep a cash imbalance from escalating into a true emergency. Many lenders have the ability to provide a line of credit or other flexible loan before a crisis takes place. Marketplace lenders offer a variety of business financing solutions, including receivables-backed loans or lines of credit, credit cards or other unsecured financing tools that provide businesses with a cash cushion. 

If you’re in an emergency situation and alternative lending isn’t an option, reach out to suppliers and vendors to extend payment terms and float your available cash until inflows increase. You may also consider contacting your best customers to inquire about accelerating payment. If you are able to clearly communicate your request, those with whom you have a strong relationship may surprise you in what they are willing to do for your business.

Cash flow management is ultimately built on having an intimate understanding of your business’ cash needs. Knowing what is predicted to flow into the business and what is scheduled to flow out is the foundation for forecasting potential imbalances and minimizing their impact on your business operations. Once you’ve built an accurate forecast, take the additional steps necessary to speed up inflows, decelerate outflows and establish a contingency plan.

We’d love to hear about steps your business has taken to stabilize cash flow. Leave a comment below

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