The good news about cash flow is that there are always ways to improve it. In this guide, we’ll share five simple steps to help you improve cash flow.
Approximately 82% of businesses fail due to poor cash management. Managing cash flow is critical to running a healthy business. Without positive cash flow, you will struggle to maintain vital company operations, grow or expand your entity, pay taxes, and settle debts, reducing your business’ survival rate.
Whether you are running an existing business or a startup, the following five strategies will help you improve cash flow and foster long-term financial success.
1. Lease instead of buying to improve your cash flow
Most business owners prefer purchasing equipment, real estate, and supplies because it results in significant cost savings in the long run. However, unless your organization is flush with cash, buying equipment results in a financial strain because vast chunks of money leave the business quickly.
Business owners that make smart choices when purchasing equipment, real estate, and supplies generally save a lot of money compared to business owners who don’t.
If your company is short of cash, using equipment can be expensive. So, buying new equipment is not the best way to save money.
By leasing or renting, money leaves the company in small increments, meaning you can still finance daily operations and keep your cash flow positive.
Leasing and renting are very similar to borrowing money. With leasing, you’re only paying for the amount of time the equipment is leased.
Renting real estate and equipment is also viewed as a business expense. This means it will be written off when paying taxes, which lowers your tax burden.
Equipment leasing is a great option for startups and small businesses looking for flexible capital.
2. Monitor expenses
It is easy to ignore minor expenses, especially when running a large entity. However, these small expenses often pile up and result in cash flow problems.
It is, therefore, important for businesses to recognize the value of a dollar and keep their expenses down. For example, it may be your advertising, office rent, or utilities. While these expenses may seem small, they can quickly add up if you are not careful. Business expenses are a huge part of every business owner’s budget.
You could also incur unnecessary costs, such as paying for unused office space. For this reason, you should consider monitoring expenses and eliminating excessive spending to improve cash flow.
For instance, you could introduce corporate cards to track employee expenses. You could also outsource specific tasks instead of hiring an in-house team. With an in-house team, you continue to pay the staff even at the time of the year when you do not require the employee’s services.
Be sure to hire a CFO for your company to enable you to monitor expenses and cash flow, among other financial aspects. A chief financial officer can also help you enhance accounting accuracy, identify tax deduction opportunities, and provide helpful insights based on your company’s financial reports to help your business thrive in challenging and steady economic times.
3. Send invoices quickly
Sending invoices immediately is one of the most effective ways to ensure receivables come in quickly. Instead of waiting until the month ends, invoice clients as soon as you close a sale or complete a project.
By sending invoices regularly, you’ll keep on top of your clients and remind them that you’re still around.
However, ensure your invoices are easy to read. Be sure to highlight the expected amount, due date, accepted payment methods, and where to pay the cash.
This can be done through email, online invoicing platforms, or by sending invoices via snail mail. If you are struggling to stay on top of your business’ invoicing process, consider investing in cloud-based accounting software, including QuickBooks, Sage, FreshBooks, and Xero, to improve cash flow.
4. Negotiate timely payment terms for better cash flow
Getting paid on time is a great way to increase your cash flow, but if you can’t get paid on time, you are sacrificing your cash flow. In addition to being able to negotiate for a better rate, you also need to negotiate a better payment schedule. In other words, how often do you need to be paid, and what is the time frame between payments? Make sure you have an agreed-upon payment schedule that makes sense for your cash flow.
Closing a sale is not enough. You should further ensure your customers make payments on time. Even when your company is exceptionally profitable on paper, if customers take too long to make payments, the business will experience a cash flow shortage. The following are ways to get clients to make payments in a timely fashion:
Provide customer incentives for better cash flow
Make your clients feel like they are getting a deal by purchasing from you. This will encourage them to pay their invoices promptly. For instance, you could offer a discount for payments made before a specific period.
Keep reminding your clients when an invoice is due. You could send an email or text message a few days before the due date and on the day they should make payment. If the client has not made payment once the invoice is due, call them and keep sending invoice reminders.
Charge late payment penalty
Be sure to create a solid invoicing policy. This involves setting a date when all invoices should be cleared and sticking to it. You should then impose a late penalty for payments exceeding the set deadline. This creates the impression that you are professional and reduces the chances of late payments.
Make sure your customers know about the late payment penalty, how much they will likely be charged and when they will be penalized. Incorporate the late payment penalty in your invoice’s terms and conditions to ensure all clients are up-to-speed with your invoice policies.
The late penalty policy is different for most industries. For this reason, research typical policies within your industry before implementing the late payment penalty policy in your company to avoid non-compliance.
5. Perform customer credit checks
The pressure to make a sale or win a client could cause you to sell on credit instead of cash. However, before allowing credit sales, conduct a credit check. If a client has bad credit, they may not make payments on time which will hurt your cash flow. If you decide to sell on credit regardless of the client’s bad credit history, charge high interest to protect yourself.
Effective cash flow management is the secret to the smooth running of day-to-day company operations. Monitor expenses, negotiate timely payment, send invoices quickly, lease instead of buy, and perform customer credit checks to improve cash flow and ensure long-term financial freedom.