If you own a business and sales, or your 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 put 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 efficiently.
For instance, if payables (your debts) are due before your receivables (money from a sale you haven't collected yet) come in, you’ll face cash flow problems. This, in turn, means that 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.
Lease, Don’t Buy
Since leasing supplies/equipment/real estate usually ends up being more expensive than buying, doing so may seem counterintuitive to someone who is only paying attention to the bottom line, or your income after expenses are paid off. But unless your company is flush with cash, you’re going to want to maintain a cash stream for day-to-day operations. By leasing, you pay in small increments, which helps improve cash flow. An added bonus is that lease payments are a business expense, and thereby can be written off.
Offer Discounts on Loans
Everyone loves an incentive, and if you offer customers a discount if they pay their bills ahead of time, you’re creating a win/win situation for both of you. Getting the cash in early helps your cash flow, of course.
Conduct Credit Checks on Customers
If a customer doesn't want to pay you in cash, then be sure to conduct a credit check — especially before you sign them up. If the client has poor credit, you can safely assume that you won’t be receiving payments on time. As badly as you might want to make the sale, the late payments will hurt your business’s cash flow. If you opt for a sale despite any questionable credit, be sure to set it up with a high interest rate.
Form a Buying Cooperative
Think power in numbers; find other like-minded companies willing to pool their cash in order to haggle lower prices with suppliers, who usually give big discounts to large firms who buy in bulk.
Improve Your Inventory
Take an inventory check. Those goods you buy that aren't moving at the same pace as your other products? They tie up a lot of cash. Instead of buying more of what doesn’t sell, get rid of it — even if you need to sell it at a discount. It's hard to walk away from products you fall in love with, hoping that someday you'll magically see heightened demand, but that almost never happens. Be objective, not emotional. (For more, see: What Is the Best Cash Flow Management Tool?)
Send Invoices Out Immediately
You'll see receivables come in more quickly this way.
Use Electronic Payments
If you pay electronically, you can wait until the morning of the day a bill is due to make payment. This buying of time improves your cash flow. You can also use a business credit card as some offer a grace period as long as 21 days, which can do a lot to increase your cash flow. You might even get cash back. But don't pile up too much debt.
Pay Suppliers Less
If you maintain friendly, regular communication with suppliers, you will have a better chance at landing better-term deals with them. Offer suppliers early payments if they're willing to give you a discount in return. (For more, see: Breaking Down the Balance Sheet.)
Open a High-Interest Savings Account
Increasing your prices is a concept that scares many business owners. They're worried it will lead to reduced sales. But it's OK to experiment with pricing to find the perfect number—how high are customers willing to go? There's no way to know unless you take a chance.
The Bottom Line
A fat cash flow is the result of operations that run efficiently and smoothly. These ten steps above should help loosen things up. (For more, see: 10 Ways to Improve Cash Flow from Receivables.)