Forecasting

Increase Cash Flow: From Cash Trickle to Cash Flow

Nov 04, 2020 • 10 min read
Cash Flow Drawing on Desk
Table of Contents

      The easiest way to think about cash flow: it’s all the money flowing in and out of your business. Each month, you have inbound payments from customers. When the payments occur at the time of purchase, the cash flow is immediate. Other times, you’ll need to take the accounts receivables route to collect on the money due.

      Conversely, money flows out your doors when you pay suppliers, make payments on loans, pay rent, and take care of any other expenses your business requires to keep operating. It’s not an inherent problem to have money leaving your business, as this is clearly a necessity.

      In order for a business to operate effectively, there needs to be at least as much money coming in as going out. Therefore, it is your solemn duty to look for ways to increase the amount of money you’re making. Having enough money on hand to cover your financial obligations makes you the proud owner of a positive cash flow. And the liquidity that comes with this type of cash flow allows you to maintain operations and consider future expansions for your business.

      On the other hand, a negative cash flow means that you aren’t able to meet your monthly obligations. It’s completely acceptable to have a negative cash flow during certain months: for example, you might purchase an expensive piece of important machinery. But your negative cash flow should ideally be limited to times where you’re investing in your business. If you experience long periods of negative cash flow, the consequences can be substantial.

      “Building a business requires cash, and cash needs to intensify when growth is accelerating,” explains business guru Andy Bailey. “But companies often fail because leaders at the top did not properly manage the money flowing into and out of the business. New small businesses don’t survive very long throughout the years, according to research from the Bureau of Labor Statistics. Research from CB Insights shows that 29% of new businesses failed because they ran out of cash. Similarly, data from Guidant Financial shows that the No. 1 challenge for 33% of small business owners is lack of capital/cash flow.”

      Your cash flow will have a major impact on the success of your business. This guide will examine multiple ways to refine your finances and increase the amount of money coming in so that cash flow becomes a strength for your business.

      Proven Tips for Improving Your Cash Flow

      Group decides cash flow plan together

      Your business has its own strengths and limitations, so it’s unlikely that all of these tips will be relevant. The important thing to do is look for actionable ways to begin improving your cash flow. Without further ado, here are 9 tips to consider:

      1. Get Cash Flow Management Software 

      When it comes to your business’s cash, who wouldn’t want accuracy and speed? Accounting software solutions offer both of these benefits, helping you to keep tabs on where you currently stand so that you can make better plans for where you want to go.

      2. Negotiate Your Costs 

      If you’ve developed good working relationships with your suppliers, don’t hesitate to discuss options with them for better rates. Perhaps they’ll lower the prices for you on the front end, or they might offer discounts for paying your bills early.

      Even if you don’t have a great relationship with a supplier, let them know that you’re interested in talking to other suppliers to lock down the best price. Simply knowing that you’re shopping around will often spur them to offer you better prices.

      3. Know When Enough Is Enough 

      Speaking of business relationships, you probably have customers and clients who continually avoid paying their bills. Perhaps they give you compelling sob stories or maybe they avoid you altogether. But there are times you’ll need to review a customer’s track record and then make the call to stop doing business with them.

      4. Use Autopay and Recurring Payments 

      What’s better than a customer who promptly pays their invoices? A customer who doesn’t even require you to go through the full invoicing process! Consider setting up your customers with autopay or recurring payments as a way to make everyone’s lives easier.

      5. Provide Early Bird Discounts 

      It might seem a little counterintuitive that accepting less money from a customer is a good way to increase your cash flow—but the faster you can get paid, the more positive your flow will be.

      Many small businesses offer discounts to customers that pay their bills before the deadline. Not only does this incentive save customers money—it also helps them to get bills off their own books, making the discount beneficial for everyone involved.

      6. Make Your Bills as Accurate as Possible: 

      There are times when business owners might be tempted to overbill a customer as a way to increase their cash flow. But this approach does more harm than good, as you will be forced to recalibrate things on the back end. In many cases, business relationships can be damaged.

      Avoid these issues by ensuring your bills are precise. Overbilling and underbilling only lead to additional work down the road, making it harder to accurately forecast your cash flow.

      7. Bulk Up Your Orders 

      You can often save money when you order in bulk from suppliers. This isn’t a feasible approach for all your orders, but look for specific areas where you could make larger orders at a more dispersed cadence throughout the year—you’ll be surprised how much you can save.

      Another way to harness the power of bulk pricing: join up with other small businesses in your area. These kinds of cooperatives allow you to combine your resources in order to score substantial discounts on supplies that everybody already needs.

      8. Get Your Inventory Clicking 

      Evaluate your inventory to discover the products that aren’t selling like they ought to. When you have inventory lingering on shelves, it might be time to kiss those products goodbye.

      This is a delicate process that will require clear data to back up your decision. But you can often boost your cash flow by streamlining your inventory and leveraging what’s performing the best.

      9. Raise Your Prices 

      Speaking of your top-performing products, you should consider a price adjustment. There’s always a chance that customers will balk at the higher price tag and sales will slow. But the beauty of price changes is that they can always be reversed.

      Review your sales data to find possible candidates for a price increase—then proceed with caution. Many small business owners have used this strategy to boost their cash flow while still maintaining customer loyalty.

      Perhaps there is 1 strategy on this list that really hits home to you, or you might want to tackle a few right off the bat. Be careful not to bite off more than you can chew, however, as this situation can leave you feeling overwhelmed.

      10. Always Have a Line of Credit Ready

      Whether your business is struggling with seasonal demands or a crisis sneaks up, a business line of credit is there to save the day. It’s a financial safety net that’s there when you need it but you’re under no obligation to use. 

      Lines of credit fill in the gaps between the ups and downs in your cash flow. Need to build up your inventory in anticipation of future sales? Borrow from your line of credit and keep the business operations running smoothly. Piece of vital equipment suddenly break? Cover the repairs with a line of credit and pay it off with the ongoing cash flow.

      A business line of credit helps you cover holes in your cash flow so your finances stay in a healthy place. Make it a habit to always have a line of credit available—you won’t regret it. 

      11. Take Advantage of Accounts Receivable Financing

      If you need to quickly convert your IOUs into cold, hard cash, accounts receivable financing will be your best friend. Basically, you get quick access to cash by selling your unpaid invoices at a discount. It’s a quick and easy way to keep cash flowing through the business pipeline.

      This solution is perfect if you have lots of money pending transfer to your bank account but need cash immediately. Instead of taking out a short term loan or maxing out your credit cards, make it a habit to take advantage of accounts receivable financing.

      Sooner or later, you’ll encounter a situation where you lack the cash to pay the bills. It doesn’t mean you’re a failure—it’s just the natural ups and downs of owning a business. Get ahead of the curve and anticipate that you’ll eventually have cash shortfalls. By applying these simple habits to your small business, you’ll always be prepared to keep the cash flowing during the good times and the bad.

      12. Use Cash Flow Projections 

      Having an accurate sense of your business’s future is critical to making decisions in the present. Cash flow projection tools help you understand whether you should be reinvesting or cutting back in your business. They also help you prepare for influxes and shortages of cash that are on the horizon so they don’t blind-side you.

      13. Find Patterns In Your Cash Flow Statement

      It’s hard to know where improvements are needed in your cash flow management unless you have a clear picture of the situation. Imagine if you had a 7-year-old son and his teacher were to send you an email stating that your child’s behavior in class was unacceptable. You then follow up with the teacher to find out exactly what the issues are, but the teacher merely responds by saying that your son is “causing problems.” This would be extremely frustrating because you couldn’t take actionable steps toward improving your son’s behavior until you knew where the problems existed.

      Your business’s cash flow can sometimes mirror this scenario. You might be keenly aware that there are issues because you’ll have difficulty meeting your financial obligations due to a lack of cash on hand. But it takes detailed analysis to understand where the problems lie and anticipate what the coming months might bring. Make sure to track your financial health using a cash flow statement. This document accounts for all money entering and leaving your business, leaving you with clarity regarding how much money will be available.

      As you analyze each month’s statement, trends will emerge. This data then helps you to forecast your future cash flow. If you seek financing for your business, you’ll find that most lenders will want to review your cash flow statement. This makes perfect sense, as they’ll be able to get a good idea of your ability to make monthly payments based on how much cash you have available each month. Of course, cash flow statements are only 1 of the resources in your toolkit. You should always use them in conjunction with a balance sheet and income statement in order to get a fuller scope of your finances.

      By combining your financial tracking with impactful strategies, such as improved invoicing and reduced costs, you’ll start seeing better cash flow for your business. Each new strategy helps to move the needle, and your financial management will enable you to identify new ways to maximize these improvements.

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      About the author
      Grant Olsen

      Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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