This is the fourth installment in our “Cash Flow 101” series—our ultimate guide to help you understand and manage your business’s cash flow, and prevent future cash flow problems. Need to catch up? You’ll find links to the previous installments in this series at the end of the article.
Businesses that lack positive cash flow—i.e., those that pay more money out than they bring in—will almost assuredly be forced to shutter their doors sooner or later. Without positive cash flow, all companies (and small businesses in particular) likely won’t possess the agility necessary to respond to today’s quickly evolving business landscape.
Despite the fact that many decision makers understand the necessity of masterfully managing their cash flow, two-thirds of all small businesses still experience cash flow problems from time to time. And on top of that, one out of every five small business owners indicates that cash flow problems are actually the norm—not the exception.
So, if you find yourself struggling to maintain a healthy cash flow, first thing first: Remind yourself that you’re not alone.
The good news is that if your business is having trouble maintaining a positive cash flow, it doesn’t necessarily mean the end of the world is approaching. In fact, by doing your due diligence and reimagining the way your organization operates, you may very well be able to get a handle on your cash flow, giving your business access to the capital it needs to grow.
10 tips for better cash flow management
1. Know when to lease and know when to buy
Virtually all businesses need equipment, facilities, and property in order to operate; whether they should buy or lease those items is another question.
If your business is strapped for cash, you might want to consider leasing equipment and renting retail or office space rather than buying it outright. In addition to getting access to the materials and spaces your organization needs to be successful, when you choose to lease those items, you won’t have to tie up significant chunks of your capital. In other words, your business will be better positioned to respond to new opportunities and address unforeseen challenges.
Beyond that, when a business buys computers for its employees, for example, it owns them. While that might sound pleasing to the ear, it’s important to consider the speed at which technology evolves. Are you comfortable with your employees using four-year-old technology?
When businesses lease their computers, to continue the example, they’re also able to swap out old machines for new ones once contracts are fulfilled. So if your business is low on funds, you might want to look into lease financing instead of heading over to the bank to ask for a loan.
Once you’ve solved your cash flow problems, it might be time to look into whether more long-term arrangements make sense, like buying office space. Owning your own property means your business will essentially be paying rent directly to you (or more specifically, your LLC)—and there are also tax benefits to take into account, too.
2. Make it a habit to shop around for better prices
How confident are you that you’re getting the best deals on your supplies, systems, and utilities?
While it’s probably counterproductive to shop around for new suppliers every other day, it might be worth reassessing your operations on a regular basis—whether that’s monthly, quarterly or even yearly will depend on the scope of your business.
In today’s competitive and connected marketplace, there certainly isn’t a shortage of businesses vying for your company’s dollars. But remember: it’s important not to pick new suppliers based on price alone. After all, if shipments don’t arrive on time or cloud computing assets aren’t always available, your business could very well take a hit.
So when shopping around for new suppliers, certainly look at price—that’s how you’ll solve your cash flow problems. But you need to consider a potential new vendor’s track record, too.
3. Consider increasing the prices of your products and services
When is the last time your company raised its prices?
While it’s probably pretty safe to say that a lot of your customers will likely be at least a little irked when you raise your prices, such is life. In fact, most folks are already used to price increases: Each year, health insurance costs go up, rent increases, and consumer goods generally become more expensive. So if you haven’t increased your prices in quite some time and you’re struggling to solve your cash flow problems, now might be the right time to bump them up—at least a bit.
But don’t simply increase them overnight; you don’t want to risk turning your loyal customers away. Instead, by carefully planning your price increases and marketing them effectively, you’ll be able to generate more revenue—and maybe even more sales—while padding your bottom line.
There are a variety of tactics you can employ to reduce the likelihood your customers will get angry when your business raises its prices. For starters, don’t increase your prices unless you’re sure that your customers are thoroughly satisfied. You can also consider trying to time your price increases with improvements to your products.
For example, a software-as-a-service (SaaS) company could consider upping its subscription fees after undergoing a major upgrade and rolling out new features. Beyond that, your business could bundle its services together for a lower average rate (much like cable companies do), encouraging customers to buy more than they otherwise might.
4. Bill on a more immediate basis
It’s not uncommon for businesses to wait until the end of the month to invoice their customers all at once. But common sense tells us that the longer you wait to send out invoices, the longer it’ll take for you to collect on them.
If you’re having cash flow problems, you might want to consider accelerating your billing process, sending out invoices the moment when jobs are complete and orders are shipped. In doing so, you ensure that your clients get their invoices faster—which hopefully means you’ll get paid quicker.
5. Incentivize customers to pay sooner
Who doesn’t like paying less for products or services?
To solve your cash flow problems, you might want to offer customers favorable payment terms if they pay their invoices early. For example, offering 2/10 net 30 terms means your clients get a two-percent discount if they pay their bills within 10 days; otherwise, full payments are required to be made within 30 days.
Think about it: Would you be more inclined to pay your credit card bill the moment it came if you were able to write a check for less than the amount due to settle it in full? It might be worth taking a similar approach with your clients—particularly those who have developed reputations for being a little more hesitant to promptly settle their invoices.
6. Devise new campaigns to boost sales
If sales are stagnating—or even if they’re not—from time to time, you might want to consider retooling your campaigns. One need look no further than Coca-Cola, whose recent “Share a Coke” campaign has been credited with bringing the beverage company a two-percent spike in sales.
The best part? Coke didn’t really have to do a whole lot to generate these new sales; the whole campaign consists of simply having names printed on bottles and cans, the idea being that customers would buy ones featuring their own names, as well as names of their friends, coworkers, and loved ones.
If your business is struggling with cash flow, it might be time to go back to the drawing board and think about new ways you can boost your own sales. For example, restaurateurs could see how customers respond to new dishes or new cocktails, or web design firms may find an uptick in revenue if they include the creation of a free logo with their website development packages.
No matter your vertical, switching things up a little bit may very well direct more attention on your brand, bolstering your bottom line—without even necessarily costing you that much.
7. Use an invoice-clearing service
If net 30 is routinely turning into net 60 or even net 90—and your cash flow is grinding to a halt as a result—you might want to look into an invoice-clearing service like Fundbox. With Fundbox, business owners are able to access the cash they need to grow immediately, even if their customers are slow in paying their bills.
Here’s how it works: For a small fee, Fundbox advances payments on the outstanding invoices of your choosing. Once you’ve set up an account, you’ll be able to select which invoices you want to clear. Then money is transferred to your bank right away. You then have 12 weeks to repay that cash advance (the sooner you repay, the lower Fundbox’s fees end up being).
Instead of stressing over where you’ll find the money to pay your own bills, Fundbox gives you the peace of mind that comes with knowing you always have access to capital you need to grow your business.
8. Maintain cash flow statements
Though they might seem cumbersome from the outset, believe it or not, regularly maintaining cash flow statements can reduce the likelihood you’ll encounter cash flow problems—at least unexpectedly. To see a visual example of how cash flow works within a business, you can download this free cash flow example as a PDF or Excel sheet.
Generally speaking, cash flow statements track a business’s cash inflows and outflows relating to its operations, its investments, and its financing activities. All publicly traded companies are required by law to maintain cash flow statements, releasing them at least once a year.
While a larger company might not be too concerned with how its cash flow is coming along, many smaller businesses choose to regularly produce statements of cash flow on quarterly or even monthly bases. In doing so, they’re able to predict with much greater accuracy how healthy their cash flow will be in the future.
By producing cash flow statements, you’ll be able to make the right adjustments to your business should you need to—whether that’s increasing prices, reducing expenses, or embarking on new campaigns—to make sure your organization always has the money it needs to thrive on hand.
9. Leverage modern technology
There’s a reason Slack, a web-based collaboration tool, is valued in the ballpark of $2.8 billion: It provides businesses with a ton of utility, allowing all employees to stay connected and be more productive, no matter where they happen to find themselves. In other words, Slack increases business output, and many decision makers consider it worthwhile to pay to use it.
If your cash flow is suffering, you might not want to invest in new technology; spending money when your purse is nearly empty may seem counterintuitive, but facts are facts. According to a recent study, today’s workers are 84 percent more productive than their peers who worked during the 1970s, thanks to the introduction of modern technology to the workplace.
Because the right technology makes your employees more productive, it follows that you’ll have more goods and services to sell than you would with employees relying on outdated technologies. Also consider this: You have to assume that your competitors, or at least some of them, are investing in new technology. So if you’re not, the ball is most assuredly in their collective court.
Beyond simply increasing operational efficiencies, employees that are given access to new technology will likely feel more committed to their companies, as their companies will have proven that they’re committed to their staff and to success.
10. Focus on cash flow instead of profit
It’s true that many business owners open up their doors for the same underlying reason: to turn a profit. But chances are your business will have a considerably more difficult time realizing one if you’re constantly struggling to pay your bills.
Even if yours is the best business plan ever written, without access to the cash necessary to respond to new opportunities and meet your obligations, you might not get a chance to see your company reach its full potential. Instead, you could end up having to close down shop sooner than you expected.
For example, your business might generate a considerable amount of profit. But a good majority of that profit could be tied up in receivables, which doesn’t do you much good when it comes to you needing cash to cover your operating expenses.
But when you direct more focus on consistently maintaining a positive cash flow, the profits you seek will almost certainly follow.