Companies must have the ability to pay their bills. Data suggests that cash flow issues cause 82% of businesses to close their doors. Without capital, it’s not possible to acquire raw materials, market your services, or pay your employees.
Cash flow is the money that flows into your company and out. It flows into your company in the form of revenue, investments, and debt. When it flows out, the cash covers expenses.
Ideally, more cash flows in than out. When the flow is positive, companies pay their expenses and employees on time. Then, there is enough to reinvest back into the company.
When companies see a negative flow, they can’t cover their financial responsibilities. Then, they have two options.
Owners can shut down the business and liquidate the assets. The other option is to find ways to finance the financial gaps. In a tight spot, the answer is to obtain debt and incur the interest rate charges.
Although some accounting tricks can help business owners deduct interest rate charges, it’s best to avoid falling into the negative space.
We outline nine tips to help improve your company’s cash flow.
1. Negotiate Quicker Payment Terms with Clients
In the B2B world, companies receive time to pay their bills. Corporations and enterprises receive up to 90 days to pay their suppliers. Small- and mid-sized companies usually receive 30 to 60 days to pay their invoices.
Payment terms also depend on the industry.
A small business that receives orders from corporations will see its volume sales improve. However, some corporations wait 90 days to pay the bill. A span of 90 days for a small company is a big deal, especially if that’s your only client.
The time puts the small company in a cash flow crunch. However, it’s difficult to turn down prominent clients.
Nonetheless, try negotiating quicker payment terms with all clients. If you can negotiate 30-day payment terms for some orders, that becomes a significant boost to your company’s liquidity.
With some revenue flowing in, you can start cash flow planning.
Read more about cash flow planning here.
2. Provide Incentives for Early Payments
When retailers hold sales, they know that their revenue takes a slight hit. However, they make it up with volume.
The same strategy applies to incentivizing early payments. Whether you provide discounts, a free service, or a free item, the early payments keep your cash flowing.
For example, if clients pay your invoice within a week, offer a 10% discount. If they pay it within two weeks, lower the discount to 5% Then, lower it to 2% if they pay the invoice within three weeks.
Some people don’t see a 10% savings as significant. However, it provides nice savings on invoices that have amounts in the thousands.
Smart business owners encourage their accounts payable department to find opportunities to save money too.
3. Run Credit Checks
Before banks issue loans to business owners, homebuyers, and vehicle buyers, they run thorough financial background checks.
Small companies can employ the same strategy. If your shop does not have the resources to run detailed credit checks, you can request references from the client. Then, your accounts receivable department calls the references and finds out how quickly the client pays their bills.
Based on the information your team gathers, you can grant the client credit or not. Plus, the information helps you set payment terms for them.
4. Understand the Trends
Seasonality occurs in the business world. Retailers have extended the Christmas shopping season to include November. They have also extended other shopping seasons and added new ones such as back to school.
Business owners can employ several tools to forecast demand and seasonal trends.
The data helps you make decisions about your inventory, marketing plan, and cash flow.
If you have a good grasp on an upcoming opportunity, you can squeeze your company’s liquidity. The goal is to net a greater cash amount by capitalizing on seasonal demand. Then, practice conservative spending once the demand subsides.
5. Lease Instead of Buy
One debate that continues is whether it’s more beneficial to lease or buy. In most cases, industrial companies benefit from leasing equipment instead of buying it.
Purchasing manufacturing, construction, and heavy machinery make sense when the company will use them consistently. As it depreciates, you can deduct the value in your business taxes.
Business owners who do not need this equipment consistently or don’t have the extra storage space can lease it. Leasing frees up your cash flow.
6. Keep Prices Competitive
Companies that face cash flow issues often turn to increasing prices to fix it. When you raise prices, calculate the number of customers you might lose. Then, figure out the amount the potential revenue the increase might net your company.
If you break even, the increase can work in your favor.
7. Upsell
When your customers will not respond well to a price increase, consider upselling instead.
A new feature to a product or adding value to services can improve your revenue stream.
While Apple is the exception, they have done a good job selling new iPhone models at higher prices year after year.
Your company can also develop tiered product and service packages that upsell clients without hard-selling them.
8. Review the Operating Expenses
Another temptation business owners have when facing cash flow issues is to cut human capital. Instead of firing employees, consider reviewing the operating expenses first.
It’s always possible to optimize processes. Your company can go paperless or you can add a digital component to your marketing plan.
9. Oversee the Accounts Receivable
Business owners must delegate. They also need to keep an eye on every department including accounts receivable and payable. Seeing the money that comes in and goes out puts things into perspective.
Compile the reports at regular intervals. Then, spot patterns that benefit your company and identify waste.
Conclusion
To improve cash flow, use a combination of strategies. Try collecting payments from clients sooner. Companies that capitalize on demand can enjoy the benefits of seasonal trends. In addition, business owners benefit from reviewing accounts payable and receivable reports. The data helps owners spot areas that they can optimize and make leaner.