I have seen too many profitable businesses fail because they had poor cash flow management and could not pay the bills. They focused all of their attention on the bottom line because they thought that was all it took to run a successful business. In reality, small business owners need to focus on the money coming in and going out the door if they want to grow their business.
This article will discuss six easy strategies to improve your cash flow.
1. Bill Up Front
One of the best things a small business can do to improve its cash flow is to bill upfront. The advantages of billing upfront are that you don’t have to worry about not having enough cash to pay your employees. Also, you do not have to worry about collecting receivables from customers who will not pay.
The disadvantage is that in some industries, like Construction, you do not know the actual costs until they have been incurred. In this case, it would be a good idea to bill for estimated costs or a portion of the costs. You can reimburse all excess back to the supplier
2. Offer Discounts for Early Payment
If you do not feel comfortable billing up front, offering a discount for early payment is a great way to get paid faster. An example of an early pay discount would be 2% if paid within ten days.
The disadvantage, of course, is that you do not get paid the total value of your product or services. Therefore, we do not recommend this strategy if you are in a low-margin industry.
3. Form a Buying Cooperative
This is one of the few times you will want to play nice with your competitors. By forming a buying cooperative, you will receive more favorable rates from suppliers that offer more significant discounts to firms that buy in bulk.
The disadvantage is that this takes more work to pull off, and you will be relying on the support and cooperation of at least one of your competitors.
4. Cut any Unnecessary Expenses
Go through your expenses and list the mandatory versus the nice-to-have expenses. Then, you need to go through each expense and ask yourself if it adds value to your business. Some questions to ask yourself are:
- Are there any recurring expenses you completely forgot about?
- Can you consolidate any of your tools and subscriptions?
- Does this product or tool help your company make more money?
5. Use a High-Interest Saving Account
Just because you have a lot of cash on hand does not mean you are safe from the pitfalls of negative cash flow. If you have any idle cash sitting around, invest in a money market fund or a high-interest savings account.
These short-term investments will pay you interest on your average balance each month. Although it is an admittedly small amount of money, it will still help offset some of your cash disbursements.
6. Open a Line of Credit
Short-term financing will help smooth lumpy earnings. If your business relies on seasonal earnings, use a line of credit or a government loan. This is a great tactic when there is less money coming in, but you know you will receive income to pay off the loan in a future period. This method is not advisable if you do not project to earn money in the future.
At Windstone Financial, we have helped numerous businesses improve their cash flows. In addition, we have helped change the trajectory of failing businesses by implementing custom cash flow solutions for their businesses. If you need help managing your cash flow, click the button below to speak with a CPA today!