We often think that businesses have to close their doors because of a lack of customers or because they’re not making enough sales. But actually, that’s not always the case — a business can have plenty of customers yet still end up having to cease trading, and that’s all because of poor cash flow. In one study, some 80% of businesses that closed cited poor cash flow as a major contributing factor.
If your cash flow is in healthy condition, then you can be reasonably confident that you can weather the small issues that all businesses face from time to time. The tricky thing is, of course, getting your cash flow into a healthy state.
Cash flow improvement strategies
In this guide, we’ll look at some tried and tested methods for boosting your business cash flow, which should provide a little bit of breathing room.
Offer Discount For Early Payments
You might have a lot of money owed to you, but until it’s in your account, there’s little that you can do. If you’re a B2B operation, then you might find that you’re continually waiting for your clients to pay their bills — and in the meantime, you’ll be putting your business in jeopardy. After all, you have your own bills to pay.
One way to encourage your clients to pay promptly is to offer a discount for early payment. They’ll be more likely to get out their credit card if they know they can save 3 – 5% on the cost of the invoice.
Lease Rather Than Buy
It’s great to have a lot of cash sitting in your business bank account, but it can all be wiped out in one single transaction if you need to buy expensive machinery or other equipment.
While you’ll be investing in the equipment to help you make more money as a business, you might have to wait a while before the investment pays itself off. In the meantime, you could have to face managing your business from a precarious financial position.
The solution? Looking at leasing/renting your equipment, rather than buying. It’ll give you the tools you need without having to break the bank. The downside is that you won’t own the equipment, so it can’t be considered an asset. However, that’s preferable to having to close your business due to cash flow problems!
Perform Customer Background Checks
It would be nice if you could trust that all of your clients would pay their bills on time. Alas, that’s not really the world we live in. Even if your clients fully intend to pay the money they’re owed to you, the reality is that some just won’t be able to — and in truth, they were never going to be able to.
Some businesses are happy to use the services of other businesses as a last-chance shot at achieving glory. If they fail, then they’ll at least know they tried. Unfortunately, for you, that’ll mean a bill that remains unpaid.
One way to get around this is to perform customer background checks, especially if it’s for a job that requires significant time and effort. Understanding their financial standing can provide terrific insight into their ability to pay. Of course, you don’t have to reject a client just because of a background check, but it can mean that you ask for a bigger upfront payment.
Take Out a Short-Term Loan
Long-term cash flow problems require different solutions to short-term cash flow issues, which is something that most businesses experience from time to time. If you need a quick injection of cash, then take a look at short term business loans, which can provide the money you need without having to take on the burden of long-term debt. Applying for and receiving a short-term loan is a relatively straightforward process in today’s digital world, too.
Up Your Prices
The easiest way to increase the amount of money in the bank is to increase the amount of money you earn from each sale. Businesses are naturally hesitant to increase their prices, on the basis that, well, what if customers refuse to pay more and the business is forced to lower prices again to win them back?
You can see the concern, but increasing prices can work, provided it’s managed correctly. The key is to increase prices slightly. Most businesses that have problems with price increases do so because they went overboard. Also, keep in mind that price increases shouldn’t serve as the only tactic deployed to solve your cash flow problems, but should rather form part of a broader approach.
Consider Invoice Factoring
As we mentioned above, many businesses fall into cash flow problems not because they’ve not made sales, but because they’re having trouble getting paid for those sales. The bottom line is that while other businesses are more than happy to use your products/services, paying you is less of a priority.
If you find that you need to get some money in the bank, then consider using invoice factoring, which will give you 90 – 95% of the value of the invoice. It’s better to get 100% of the invoice, but if you’re in a difficult situation, then invoice factoring can help.
Negotiate With Your Suppliers
There are two ways to improve cash flow: either increase the amount of money flowing into your bank account or decrease the amount of money flowing out of your bank account. If you have a lot of suppliers — and thus a lot of bills to pay — then consider negotiating with your suppliers to pay a lower rate.
You’ll often find that suppliers are more than happy to give a small discount, especially if you’ve proven to be a good long-term customer. And of course, if they’re not willing to give a discount or they increase their prices, then you could always look at switching to a different, cheaper supplier.
Pay Bills At The Right Time
Many businesses pay bills as soon as they arrive. If that’s you, then it might be worthwhile reconsidering when you pay your bills, especially if you’re routinely finding yourself short of cash to pay other suppliers.
In some cases, it can be best to hold back from paying a bill for a few days until you have more money in the bank. So long as you pay within the terms outlined by the supplier, then there’ll be no issues.
Understand Your Low Periods
It’s rare that a business always has a firm grip on its cash flow. There are usually a few periods throughout the year when things get a little tight. You can help to manage your cash flow problems more easily by understanding when your low periods occur.
For instance, at which points in the year is your business usually the slowest? If you can identify when these are, then you can put extra money away to tide you over. Also, this knowledge will give you peace of mind that your slow period isn’t forever.
Make It Easy For Customers to Pay
You can’t always make your customers pay as soon as you’d like them to. However, what you can do is make it easy for them to do so. A customer will be more likely to pay the moment the invoice arrives if they’re given an option that makes payment as easy as possible.
For example, let’s say you sent a digital invoice. If there was a “pay now with one click” option, then you’d likely see an increase in the number of clients paying immediately. Also, keep in mind that businesses have different ways that they prefer to pay, so it’s best to make as many different options available as possible.
Work on Relationships
You can increase the chances of getting paid early by actively nurturing your customer relationships. Once you’ve formed a bond, you’ll be in a better position to ask them to pay their bills on time. They’ll want to help you out.
Work With a Professional
Finally, it’s recommended to work with a professional financial advisor, especially if you’re experiencing cash-flow issues on a long-term basis. They can help to identify financial errors, where you can cut back spending, and generally offer advice about how you improve the overall health of your business.
If you’re not sure where to find a financial advisor/accountant, then ask around for recommendations. You’ll need to pay for this service, of course, but it’s not an exaggeration to say that it really can make all the difference to your business.
Conclusion
Businesses face a lot of challenges, but they’re arguably no more challenging than ensuring that the financial books are in line. If they’re not, then things can quickly unravel; as we mentioned earlier, some 80% of businesses that ended up closing did so due to cash flow problems.
No matter what position you’re starting from, keep in mind that there are always ways to get your cash flow back on track. Take the tips we’ve outlined above, and it won’t be long before you’re feeling more confident about your financial standing.
