Cash flow is the total amount of money moving in and out of a business. If you’re a small business, having positive cash flow is necessary for your daily operations, like buying inventory and paying your team. But it’s also necessary to settle debts, reinvest in the business, attract investors and protect the business in case of sudden downturns. So having a healthy cash flow is crucial for short- and long-term success.
One of the simplest ways to improve cash flow is to reduce your expenses. If you hire a certified business accountant, they can help you do just that. They’re experts at analyzing your numbers, finding savings and tax reductions and improving your cash flow.
Below, you’ll find some tips to consider that may help you improve your cash flow in the meantime.
Going Remote and Other Expense-Reducing Measures
Many of the world’s big tech players have embraced fully remote or hybrid work models thanks to COVID-19. If your business offers professional services, going remote will drastically reduce your expenses, even if you pay for work-from-home setups for your team. If you still need to meet in person occasionally, have staff “on-site,” or meet clients, you can downsize or consider a coworking space.
If you’re not a business that can work from home, look for other cost-cutting measures like leasing vehicles and/or business equipment, taking advantage of supplier discounts for bulk purchases and early payments – as long as those purchases will move quickly and the early payments don’t result in negative cash flow.
Think of Cash Flow Management as a Daily Task
Ensuring that your receivables are converting into cash needs to be addressed every day, especially if you’re a startup. While you don’t want to call clients with outstanding accounts daily, dedicate a portion of your day to brainstorming ways to optimize how your sales convert to cash. Some ideas include:
- Send out invoices immediately and make sure they’re accurate.
- Revisit your payment terms regularly to ensure they still work for you and consider implementing a down payment policy.
- Educate your sales and receivables staff to ensure their all familiar with the payment terms.
- Audit your inventory to know what’s selling, what’s not and if you need to get rid of stale inventory at a discount.
- Forecast revenue and expenses for the next week, month, six weeks, quarter, year to help you plan out cash flow needs and strategies.
Early-Payment Discounts & Late-Payment Penalties
There’s a reason why some suppliers offer discounts for early payments – those discounts may (or may not) cut slightly into profits, but some argue that cash in hand is better than profits on paper. This is where predicting your cash flow expectations can help you decide when cash flow is more important than potential profits.
On the other hand, your clients may be better motivated by late-payment penalties. You may also want to consider a credit limit, especially for new clients. If you still have issues collecting overdue accounts, maybe a factoring partner is the answer. Factoring is essentially outsourcing your accounts receivable department to a company that will pay you a percentage of your receivables up front and take over collecting on those accounts. This option is probably best for businesses with many receivables and a severe cash flow conversion problem.
Reconsider Your Pricing Strategy
Knowing your customers well can, among other insights, let you know if they can afford to pay more for your products and services and how willing they are to do so. This would instantly boost your cash flow, but it must be done strategically. You may lose customers, but it might make more sense to do so if the increased revenue covers their purchases and your long-overdue accounts.
