Positive cash flow is critical to your business’s financial health. Without adequate cash flow, your business will cease to exist—even if it’s profitable on paper.
There are many good ways to improve cash flow for your business. There are also short-term cash flow improvement strategies that could harm your business in the long run. The best ways to improve cash flow maximize your business’s profitability and your available cash at the same time. However, doing this isn’t always intuitive—which is why we’ve written this article highlighting the 12 best ways to improve your cash flow.
Before we dive into that list, let’s take a closer look at cash flow in general.
What Is Cash Flow?
Before you can learn how to improve cash flow, you first have to understand what cash flow is. Cash flow is the net amount of cash moving in and out of your business at any given time. Positive cash flow means you are adding to your business’s cash reserves. Negative cash flow means you are depleting your cash reserves.
Negative cash flow isn’t always bad and doesn’t always mean your bank account will go into the red. Most businesses experience negative cash flow from time to time, especially if there is a seasonal component to the business. The trick is to make sure you always have adequate cash on hand to cover your expenses and obligations and to have more positive cash flow months than negative cash flow months.
You can track your business’s historic cash flow using the statement of cash flows report. This is one of the three key financial statements you should review in your business each month. In fact, we would argue it is the most important financial statement in your business.
Another method for determining your business’s cash flow is to use your profit and loss statement and balance sheet or your bank statements to run cash flow calculations. This will take a little more time than analyzing your cash flow statement, but calculating your cash flow manually on occasion can help you better understand trends in your business and the cause of those trends.
Even if your business already has good cash flow, it’s still a good idea to work to improve it. And if your business’s cash flow isn’t good, it’s critical for you to take steps to improve it right away. There are few things more stressful than having obligations you can’t pay due to a lack of cash. Fortunately, there are 12 steps you can take to improve your cash flow, and most of them are easy to implement.
12 Ways to Improve Cash Flow
Overall, cash flow is a combination of inflows and outflows. When you have more cash coming into your business than going out of it, you have positive cash flow. When the opposite is true, you have negative cash flow. Remember, negative cash flow doesn’t mean your bank account is overdrawn, but it does mean you are depleting your historic cash reserves.
Many business owners tend to focus exclusively on either cash inflows or outflows, but this slows down your efforts to improve cash flow in your business. You will improve your cash flow faster if you simultaneously combine improvements to your cash inflows and outflows.
Below, we’ll break down various ways to improve cash flow, based on either your cash inflows or outflows.
Many business owners either ignore cash inflows completely or focus exclusively on total sales. Although you should continually look for ways to improve your total sales, you must be careful not to harm your gross profit margin in the process. The following six tips will help you maximize your cash inflows and your profit margin.
1. Increase Your Prices
When a customer buys a product or service, they consider a number of things in addition to price. If you provide your target customers with the results they value, then price doesn’t factor heavily in your customers’ purchasing decisions. Determine why your customers buy from you in the first place, and then amplify those reasons in your marketing and sales communications to decrease price sensitivity.
Increasing your prices lets you improve your total sales without additional investment on your part, making it one of the most effective ways to improve your cash inflows while also improving your profit margin.
2. Upsell to Your Existing Customers
It’s easier to sell to a customer who has purchased from you in the past than it is to acquire a new customer. It’s also less expensive to keep a customer than it is to get a new one. If you aren’t offering new or complementary products and services to your existing customers, you are missing out on a key opportunity to improve your cash flow.
Analyze your customers’ previous purchase history, then reach out to them to offer complementary products or services. If you don’t retain customer purchase history, you can instead train your staff on how to offer complementary items at the point of sale to increase your average sales ticket.
Like with price increases, upselling to your existing customers typically requires little to no additional investment on your part.
3. Stay on Top of Your Accounts Receivable
If you extend credit to your customers, it’s crucial for you to stay on top of your accounts receivable. When you deliver a product or service to a customer and let them pay you later, you have to foot the bill—and pay out the cash—to cover the expenses associated with delivering that product or service with the cash you currently have on hand. This can have a significant negative impact on your cash flow if you have customers who are slow to pay.
Make it a practice to regularly review your accounts receivable aging report and follow up with customers whose invoices exceed the payment terms you’ve extended. Working to make sure your accounts receivable stay current is an easy way to ensure your cash inflows remain healthy.
4. Incentivize Your Customers to Pay Faster
This goes hand in hand with staying on top of your accounts receivable. If your customers have an incentive to pay faster, you are more likely to keep your accounts receivable and your cash flow in good shape.
Consider a cash payment or early payment discount (make sure you aren’t dipping into your profit margin if you do this) to speed up customer payments. If you don’t want to extend discounts, simply including a credit card payment link on your invoices can speed up collection significantly. The improvement to your cash flow will usually offset the cost of accepting a credit card payment.
5. Open New Sales Channels
Having multiple sales channels increases the number of customers who are aware of and will purchase your product or service. If you sell exclusively in-person, consider developing an online presence. If you sell online, look at different venues for selling other than just on your website (being mindful of profit margins, of course).
You can also explore collaborative relationships with other businesses offering complementary products or services. For example, a massage therapist might offer to provide services in a chiropractic clinic once a week. Just keep in mind that opening new sales channels can require an investment, so make sure to do your research to make sure it is viable for your business before taking the leap.
6. Maximize Your Inventory
Many businesses carry too much inventory that doesn’t turn quickly enough. Even service businesses usually have at least one offering that isn’t very profitable. Ideally, you want to make sure you are focusing on the products or services in your business that sell the most, in the least amount of time, for the highest profit.
Analyze your products and services and identify the items that sell well and provide a good return on your investment. Amplify your marketing on these products, and reduce—or eliminate—the things that don’t sell well or that don’t yield a good profit margin.
A word of caution: Be careful about discounting products or services, even to maximize your inventory. Having a sale is often the go-to solution for increasing cash inflows, especially for product-based businesses. Although this does provide a temporary boost to your cash inflows, these discounts can devastate your profit margin. Running sales too often can also encourage discount shopping behavior in your customers—a habit that’s difficult to break.
Improving your cash outflows alongside your cash inflows is like rocket fuel for your business’s overall cash flow. The key is to not starve your business for resources in the name of saving money on expenses. The following are six ways to make sure your cash outflows support your healthy business:
7. Evaluate Your Expenses Often
At least once a quarter, do a line-by-line deep dive into your profit and loss statement. Look for unused subscriptions, excess office expenses, and any duplications in services you can eliminate to improve your cash flow without harming your business’s efficiency. You want to trim fat—not cut into the “muscle” that helps you or your team be productive and profitable.
If you have a hard time deciding where to start with your expense analysis, we recommend running a “profit and loss percentage of income” report and analyzing the expense with the largest percentage first. This report is available in most small business accounting packages. If your accounting software doesn’t provide the report, you can easily calculate the percentages yourself by dividing the expense amount by your total income, then multiply that number by 100 to get a percentage: (Expense Amount / Total Income) x 100 = Expense Percentage of Income.
8. Lease, Don’t Buy
Whether it’s a piece of office equipment or a new vehicle, consider leasing instead of buying. Leasing can help you always have the newest—and most efficient—equipment on hand without shelling out a lot of cash to acquire it.
Another benefit of leasing is the lessor will often cover repairs and maintenance as part of the lease agreement, saving you money and improving your cash flow in the long run.
9. Ask Vendors for Extended Payment Terms
Asking for terms beyond the typical Net 30 for large purchases will keep you from taking a big hit to your cash flow all at once. Extended payment terms also give you more time to sell the product before the payment is due to your vendor. Many vendors are happy to extend 30/60 or 30/60/90 payment terms to their loyal customers.
If your vendor doesn’t offer extended payment terms, ask if they will offer you an early payment discount instead. Your cash flow will still take a temporary hit, but your overall payment will be lower.
10. Buy in Bulk—Even If You’re Small
Vendors love large orders and often offer pricing discounts to customers who buy in bulk. Many small business owners think they can’t take advantage of bulk discounts, but with some creative thinking, even the smallest businesses can enjoy large-business discounts on materials and supplies.
Partner with another business—or several other businesses—and place a bulk order for the products you all use. Divide the discount among all the participating businesses—you could even let the business that accepts the shipment take a greater percentage of the discount—and everyone’s cash flow improves.
11. Get Efficient
The less time you spend producing a product or delivering a service, the more profitable your business is. This is especially true if you have employees you pay by the hour. Working to improve efficiency will not only improve your bottom line, but it will also improve your cash flow.
Consider upgrading any old equipment, invest in technologies that minimize duplicate efforts through automation, and explore performance incentives to help your business become more efficient—and more cash flow positive.
12. Use Other People’s Money (Carefully)
Not all debt is bad. Sometimes it makes sense to leverage debt in order to protect your cash flow, but you must be careful here. You should only borrow money if you know your business will make money as a result.
Consider your different business loan options and decide if taking on a certain type of debt can help your business grow in the long run.
Manage Your Improved Cash Flow Effectively
Business owners are only human, and cash flow improvements can erode quickly without an effective cash management system in place.
Implement a system in your business where you regularly review and update your budget. You can do this as part of your routine expense evaluation, but don’t focus exclusively on cash outflows. Measure your business’s cash inflows against your outflows, and adjust both as your budget dictates.
In addition to regular budget reviews and updates, consider implementing a behavior-based cash management system like Profit First. The Profit First methodology forces cash flow improvements in your business. By restricting the amount of money available for expenses while setting aside cash to ensure you can pay yourself, your taxes, and build a savings account, you can make sure your business always has cash on hand and continually strive to build positive cash flow.
The Bottom Line
Many business owners overlook small changes they can make in their businesses, thinking the changes too small to be worth the effort. But as you can see from the 12 tips shared here, a combination of small changes to inflows and outflows can have a tremendous impact on your overall cash flow.
Once you start to see your cash flow improve on your financial statements and in your bank account balances, finding new ways to continue to improve it can become something of a game. And, like most games, it’s more fun to play with someone. Enlist the help of your accountant or bookkeeper to help you find innovative ways to leverage the 12 tips in this article to improve cash flow in your business. Not only will they be happy to help, but they will also help you stay accountable to the changes you decide to make in your business.
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