If you own a business and your sales or top line are growing at a rampant pace and you're increasing profits each year, you’re certainly headed in the right direction. But don't let your guard down. Even growing, profitable companies can be hit with cash flow problems if their finance, operations, and/or investing activities aren't running smoothly.
For instance, if your payables are due before your receivables come in, you’ll face cash flow problems. This, in turn, means you won’t be able to pay your bills on time, which can lead to bigger problems, like making payroll in a timely fashion and facing questions of creditworthiness. If you want to improve cash flow, think about implementing some of the following strategies.
1. Increase the Prices for Products or Services
Many business owners worry that if they increase the price of their goods or services, they'll alienate loyal customers. However, it's important to experiment with pricing fluctuations. By doing this, you can come to the ideal number. The goal is to determine how much your customers are willing to pay before sales begin to slow.
2. Use Electronic Payment Systems to Improve Cash Flow
If you submit electronic payments to vendors, your business can wait until the morning of a bill’s due date to make a payment. This delay in payment (without being late on a payment) will work to greatly improve cash flow. In addition, business credit cards sometimes provide grace periods that can last for weeks. This can also do a good bit to increase the cash flow of your small business. In fact, you can obtain some solid rewards by paying with a business credit card! However, it’s crucial to not obtain too much debt before paying it off.
3. Utilize a High-Interest Savings Account
Utilizing high-interest savings accounts will provide small businesses with liquidity while also working to improve overall cash flow. Many banks offer accounts that earn interest with minimum requirements of balance. In both business savings and money market accounts, interest rates will be higher than standard accounts.
4. Improve Your Inventory
It may be time to monitor the inventory that your business has in stock. Goods that aren’t sold in a timely manner can lead to cash flow problems for your business. Instead of purchasing more items that aren’t going to sell, it may be best to make markdowns to existing inventory. We know it’s difficult to cut down on inventory options. However, it’ll be better for your bottom line to try and sell what’s left of this inventory, and then focus on other inventory options in the future. If you’re looking to earn extra cash flow for your small business, you need to drop emotions and be objective with your inventory.
5. Conduct Credit Checks for Customers
In some cases, customers may not want to pay for purchases with cash. Or, their cash balances may be low, making it easier to pay with a credit card or another form of payment. If they are one-time customers and are looking to pay for a product or service with a credit card, that’s pretty standard. However, if they’re paying a large amount or for a recurring product or service, be sure to conduct credit checks beforehand. If your client has very poor credit, it’s safe to assume that you aren’t going to be collecting payments in a timely fashion. Sure, you may really want to make that sale to assist in the growth of your small business. However, late payments (or lack of payment) can have a substantial negative impact on your business’ overall cash flow. If you really need to make a sale with someone who has negligible credit issues, ensure that you set payments with higher interest rates.
6. Form Buying Cooperatives
Power comes in strong numbers. If you can find some fellow business owners who are like-minded and looking to pool cash reserves to negotiate bulk pricing from suppliers, it is recommended that you do so. Typically, suppliers will provide significant discounts to larger firms or buying cooperatives who plan to purchase in bulk.
7. Lease Instead of Buy
As the leasing of equipment, real estate and supplies will typically end up costing more in the long run than an outright purchase, leasing may seem very counterintuitive for those only wanting to look at the profit margin. Even if increasing income is your only goal, unless you find your small business cash flush, you are going to want to maintain streams of cash to handle day to day operations. Through the act of leasing instead of outright purchasing, you will pay for an item in small increments. This assists overall cash flow. Additionally, lease payments are considered an operating expense, so they can be written off.
In Conclusion
Healthy cash flow is the result of operations that run efficiently and smoothly. While implementing some or all of the above 10 steps should help you increase your business's cash flow, you'll also want to make sure you're making the right decisions regarding your marketing, customer service, product or service development, and new customer acquisition.
That's why it's critical to review and update your business plan on a regular basis to ensure you anticipate trends and challenges before they impact your profitability.
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