5 Tips to Improve Cash Flow in Your Small Business
Proper cash flow management is fundamental to operational success, especially for small businesses forced to work with lean budgets.
If a business wants to grow, it must increase its liquid assets. Equipped with working capital reserves, a company is better positioned to settle its debts, reinvest in the business, pay expenses, and maintain a windfall for a rainy day.
But what if your business counts itself among the majority of small businesses globally (61%) that report cash flow struggles? How can you change your cash flow management strategies so that you are better positioned to make payroll, cover bills, or invest in the business?
Read on to discover five tips to improve cash flow.
#1 Project Cash Flow
Do you have a solid idea of when you will receive and spend your money, and how much will flow through the business?
It is impossible to budget or measure cash flow if you do not establish a projection. That estimate can act as a barometer, a windsock that indicates how your business is operating in relation to historical and expected performance.
To create a cash flow projection, you need to look at your previous data, using that as the basis for the upcoming year. After a baseline is established, you can make adjustments for anticipated changes in the market, be they exogenous or endogenous.
As time passes, you can update cash flow projections to more accurately reflect changes to expenses and profits.
#2 Strong Cash Management Starts with Visibility
With the tidal flow of money continuously moving into and out of the business, knowing the status of your cash flow is paramount. To gain control, you must regularly monitor cash flows. Otherwise, how do you know whether your fiscal situation is improving or declining?
It is important to note that positive cash flow does not necessarily mean you are profitable. Conversely, you could be profitable with negative cash flow. Regardless, with a better vantage over cash flow behavior, you can decide whether to maintain a cash surplus, take on strategic debt, or invest in new ways to build the business.
For that, you must project capital requirements, set budgets, and then utilize tools that make it easier to gauge business performance by:
- Monitoring cash inflows and outflows
- Identifying cash bottlenecks
- Flagging spending issues
- Tracking your budget
#3 Increase the Speed of Invoicing and Receivables
Small businesses often forget how much cash is trapped on their balance sheet. Freeing up that cash leads to improved operational efficiency and better liquidity.
To increase cash flow, you must abbreviate the time it takes for clients to pay you. The faster you bill clients, the faster they will pay you. Taking measures to trim the time it takes for you to collect receivables is the solution.
Most businesses have accounts receivable policies stipulating when clients are billed, how much they will be billed, and when to collect. But many struggle to enforce those policies. Or, they install bad policies.
Want to change that? Then follow these best practices:
- Send out invoices immediately after the current billing cycle closes
- Create transparent invoices that are itemized and easy to follow
- Negotiate terms with clients to make payment deadlines as early as possible
- Provide customers with flexible payment options, including:
- Electronic payment
- Online payment
- AHC transfers
- Automate invoicing wherever possible
- Offer discounts or incentives to clients that pay early
- Follow-up on unpaid invoices
- Increase invoicing frequency
#4 Optimize Accounts Payable
Cash flow is money in and money out.
Traditionally, the common belief was that it was better to receive money as fast as possible and then delay outflow payments for as long as possible. While there is some truth to the notion, Deloitte notes that it could be a double-edged sword:
“In some cases, delaying payment can erode supplier goodwill, resulting in slower delivery times, less willingness to fix defects, slower responses to queries and more onerous payment terms. On the flip side, paying early can sometimes yield substantial benefits in situations where suppliers offer discounts or rebates for early payment.”
Put simply, there is not a one-size-fits-all approach to accounts payable. Extending payables may be a smart strategy for some businesses but foolhardy for others. Therefore, each company must adopt a customized approach to achieve its specific goals.
That noted, some management best practices can help you optimize your accounts payable strategy:
- Centralize accounts payable processing and reporting across the entire organization so that there are universal practices and standards, measured against established KPIs.
- Develop relationships with vendors that are flexible on payment terms.
- Place stricter managerial controls over the purchasing approval process, especially for big-ticket items.
- Automate procurement wherever possible to cut down on manual errors and costs.
- Regularly review and analyze spending habits.
- Prioritize credit card bills and loan payments by due dates and interest rates.
- Establish multi-person oversight for expenses, overtime, and other business expenses.
- Install supplier portals so that suppliers can track order status, delivery schedules, and payments received.
#5 Reduce Expenses
You have to spend money to make money, right?
The answer to that is “yes, but…”
Of course, a growing company needs to strategically invest its resources or even take on debt to achieve its long-term operational goals. However, you must have clear visibility and tight control over your expenses. Because, even if business is currently booming, all it takes is a single market shock to suddenly land you in hot water with cash flow issues.
Simply throwing money at the wall is never the solution. Unfortunately, far too many businesses have made that mistake. They grew too quickly or invested significant amounts of their capital in several different projects, only for them to collectively flop or for market dynamics to suddenly shift.
In poker terms, they went all-in when a simple raise would have sufficed.
Just because the business is operating successfully today does not mean it will tomorrow, let alone six months from now. Demand could change, market conditions shift, or supply chains stall.
That is why you must be careful about overextending.
For instance, maybe outsourcing would be more beneficial than hiring more full-time employees. Perhaps there are meetings that do not require business travel and could instead be done over Zoom. Or, it could be wiser to lease equipment rather than purchase it.
Being a good steward of your business coffers requires asking, “Do we really need to spend our limited resources on this?” Sometimes, that answer will be yes. But, chances are, there are plenty of outlets where your discretionary spending could be dramatically reduced.
Gain Control of Your Cash Flow with CFO Hub
Cash flow is the lifeblood of a business. A company that improves its cash flow puts itself in a better strategic position within its market.
Whether that money will be used to pay debts, reinvest in the company, or as a reserve depends on your business; however, having positive cash flow gives you the freedom and flexibility to make the best decisions possible.
Do you need help gaining control of your cash flow?
At CFO Hub, we provide outsourced financial services. An experienced fractional CFO or controller could immediately step in, review your financial status and operational practices, and then install the necessary measures to optimize your business cash flow.
If you want to master your cash flow, contact us today to gain access to a team of financial experts built specifically for the unique needs of your company.