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 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 your 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 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.
- Even profitable companies can experience cash flow problems when their debts are due before they've collected enough money from sales to cover their bills.
- To gain control of your cash flow, consider implementing new policies such as offering discounts to customers who pay early, forming a buying cooperative with other businesses, and using electronic payments for bill paying.
- You can also negotiate better terms with your vendors, improve your invoicing procedures, and experiment with increased pricing to increase your cash flow.
1. Lease, Don’t Buy
Since leasing supplies, equipment, and 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 on your taxes.
2. Offer Discounts for Early Payment
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.
3. Conduct Customer Credit Checks
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.
4. Form a Buying Cooperative
Think power in numbers, and 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.
5. Improve Your Inventory
Take an inventory check. Make a list of those goods you buy that aren't moving at the same pace as your other products. They tie up a lot of cash and could hurt your cash flow.
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.
6. Send Invoices Out Immediately
You'll see receivables come in more quickly this way. Make sure you understand the basics of how to put together a good invoice. You'll want your invoices to be easy to read and the terms clearly stated. Have the due date stated in a few places (preferably in bold), including at the top of the invoice and on the payment slip at the bottom. Include clear instructions regarding payment types accepted. If you charge late payment fees, make sure you include this information as well.
7. 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.
8. Pay Suppliers Less
If you maintain friendly, regular communication with suppliers, you will have a better chance of landing better terms with them. Offer suppliers early payments if they're willing to give you a discount in return. Learning to master the art of negotiation is an essential part of doing business and could help you convince your suppliers to offer you a better deal.
9. Use High-Interest Savings Accounts
This will provide you with liquidity while growing your cash position. The best high-yield savings accounts offer interest rates more than 17 times higher than the national average, meaning you'll earn more on the money you've stashed away.
10. Increase Pricing
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.
What Is Cash Flow?
Cash flow is the net amount of cash that is going in and out of a company. A company's success is determined by its ability to create positive cash flows through the normal course of its business operations. Cash coming into a company, known as inflows, consists of revenues from the sale of goods or services as well as income from investments. Cash going out of a company, known as outflows, consists of expenses and debt payments.
What Are the 3 Types of Cash Flow?
The three primary classifications of cash flow are cash flow from operating activities, cash flow from financing activities, and cash flow from investing activities. All will appear on the statement of cash flows on a company's financial statements.
How Can You Increase Cash Flow?
Ways to increase cash flow for a business include offering discounts for early payments, leasing not buying, improving inventory, conducting consumer credit checks, and using high-interest savings accounts.
The Bottom Line
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.