9 Ways to Improve Your Business's Cash Flow

cash flow

Perhaps the most important financial statement your company produces is its cash flow statement. Cash flow is the balance of money going into your business against the money going out of your business. Unlike a balance sheet, which reports all liabilities, assets, and equity at a specific point in time, a cash flow statement illustrates the ratio of expenses to revenue over the course of months, or years.

This helps business owners answer a crucial question: Is my business making enough money to sustain itself?

If the answer is “No,” or even “Yes, but barely,” it’s time to find ways to improve cash flow and give your company more breathing room. Good cash flow helps you look more attractive to investors and lenders, gives you the opportunity to make big purchases at the right time, and allows freedom to handle those emergencies and unexpected expenses.

Here are nine ways to improve your business’s cash flow:

Lease your fixed assets rather than buy them

Investments in major fixed assets such as heavy equipment, machinery, or servers, or real estate can be backbreaking investments. Although renting assets may be more expensive in the long-run, making small payments can take the strain off of your budget and, because these payments are business expenses, you can deduct them. You can also easily upgrade to a newer model each year with another lease rather than buying a new asset outright.

Plus, thanks to the collaborative economy, affordable opportunities to share the cost of fixed assets with other companies are growing all the time. For example, platforms like Yard Club allow construction firms to rent an entire equipment fleet, and Breather rents out shared workspaces for days or months at a time.

Structure your payment terms to encourage on-time payment

If you find yourself constantly waiting for clients to pay invoices—and see that it hamstrings your ability to pay your own vendors—it’s time to restructure your payment terms.

Typical payment terms are “Net 30,” which means customers have 30 days from the time you issue your invoice to pay. Offer clients a small discount for paying within Net 10, and let them know you’ll charge a late fee for paying beyond 30 days. You’ll find some clients paying you right away—with cash you can use immediately in other pressing areas—while others get more serious about paying you within a month’s time.

invoice

Renegotiate with long-time suppliers

Now that you just got done shortening the payment terms of your clients, see if you can extend your own terms with your vendors. Suppliers with whom you have a long-standing and mutually beneficial relationship may be willing to sit down and listen to your offer of delivering payment within Net 30 instead of Net 10, or Net 60 instead of Net 30—perhaps in exchange for larger orders.

The flexibility to pay an invoice after you get paid yourself can be a boon to your cash flow. On the flip side, if your vendors offer reduced pricing or discounts for early payment, calculate whether this incentive is worth paying early.

Increase your pricing

While raising your prices feels like a surefire way to scare off your customers, consider experimenting with your price tag to find the sweet spot.

Rather than simply raising the price on your existing products, update your wares or services and offer them at a higher price point, while simultaneously pricing your older products slightly higher than before to encourage people to shell out the extra bit for the newest and best.

You can also try just raising prices on smaller items, like accessories in order to avoid sounding the alarm with a company-wide price hike.

Get approved for a line of credit

A business line of credit is a flexible form of financing that works a lot like a credit card. Business owners approved for a LOC can draw on their line as needed up to their credit limit, and they only pay for what they draw.

That flexibility can help cover gaps that would otherwise sink your cash flow. Do the costs of an emergency repair prevent you from covering payroll this month? Use your LOC to withdraw cash and cover that unexpected expense rather than face negative cash flow.

Create monthly or yearly subscription models

One good way to lock in a consistent source of revenue is to offer subscription models on your products or services to customers when appropriate. Offer your customers a discount for agreeing to pay for your products every month for a year, and you’ll find your cash flow will be less variable over time.

Reduce your unnecessary inventory

If you’re holding on to a lot of unsold inventory that you’re hoping will fly off the shelves at some point, it’s time to liquidate those assets and instead focus on making sure you don’t overstock in the future.

Holding on to unsold inventory is costlier than you might think. Your inventory takes up space on warehouse shelves (and thus likely costs you money, unless you own and run your own warehouse), deteriorates and loses value with time, and becomes dead stock. Inventory you can’t sell because it’s spoiled, out of season, or out of style. Overstocking costs retailers hundreds of billions of dollars in total each year.

Instead, invest in inventory management software that helps you “pull” new inventory as needed, rather than “push” it, balancing your inventory turnover ratio so you’re not taking on more than you can afford to store.

inventory

Limit costly employee spending

Sometimes your employees will spend your business’s money, either on essential tools and materials for your business or on promised perks like meals. Invest in a good expense management software that helps you put sensible limits on employee spending.

Not only will automated software cut costly and sometimes unnecessary expenditures, but you’ll also reduce the time spent reimbursing employees via collecting receipts and completing onerous amounts of paperwork.

Use interest-bearing bank accounts

Your checking and savings accounts should accrue interest, so when you do make deposits, your money makes you more money. As of 2018, interest rates are climbing, which means you’ll continue to make more and more off your savings as time goes on.

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Even profitable businesses can find themselves plagued with negative cash flow if they aren’t timing payments correctly. Cash flow mismanagement is a major reason why small businesses fail, so take the time to get your expenses under control so you stay out of the red every month.

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