Whether you are just starting or running a multi-million-dollar company, earning more than you spend is critical to your success. But balancing a business’s cash flow can be tricky, even for the savviest business owner. Hence, we listed tips for boosting cash flow in a struggling business.
Cash flow is money coming in and going out of your business. The goal is certainly positive cash flow, but there are times when this can be a struggle.
Unless you’ve designed a well-oiled plan, you might be waiting for a customer to pay invoices while your suppliers beg for their payments. Even then, events can disrupt your routine—suppliers run out of a product, costs rise, and a machine breaks. All of these can throw a wrench into your plans.
You are not alone in your struggles. Over 61% of small businesses have challenges with cash flow. The good news is that there are several things you can do to boost cash flow in a struggling business.
Why is Cash Flow Important to a Small Business?
Cash flow encompasses just about every area of your business, but your ultimate goal is to have more money flowing into your business than out.
Cash is used to pay your employees, purchase inventory and supplies, upgrade equipment, pay creditors, and grow your business. Without cash, you face an uphill battle in determining where you will get money to pay your bills.
Managing cash flow is an integral part of your business model, and you should spend time looking at cash flow and planning how to improve it. This will ensure that you have enough cash to pay for operational expenses and cover debts.
Many businesses generate income well but are left waiting for checks to arrive. Your accounts receivables will paint a rosy picture of money earned, but they are not helpful unless you pursue those funds regularly. Assuming that most clients make good on these payments, you still have a gap.
Knowing how much cash is coming and going can help anticipate shortcomings before they become significant problems. Proper accounting standards, including preparing a cash flow statement, will show you where you stand.
Cash flows through three primary sources:
- Cash from operating activities – Cash inflows from sales and outflows from what it costs to provide those sales.
- Cash from investing activities – Cash inflows from investors and outflows from the purchase of equipment and buying supplies.
- Cash from financing activities – Cash inflows from loans and outflows to paying shareholders and reducing your debt.
You can gain insights from cash flow by looking at three formulas:
- Free cash flow is net income plus depreciation/amortization minus a change in working capital minus capital expenditures.
- Operating cash flow is depreciation plus operating income minus taxes plus the change in working capital.
The cash flow forecast is cash on hand plus projected inflows minus projected outflows.
How Does Managing Your Cash Flow Affect Your Future?
Understanding cash flow aids in predicting whether you will need to raise more revenue or cut back on expenditures. It helps you understand the revenue cycles of customers, suppliers, contractors, and vendors. It can also aid in preparing for times when business could be better.
For example, if you sell ski equipment, you have high and low revenue seasons. During the fall and winter, the business will be booming. During the spring and summer, the company will be slower. Understanding cash flow helps you prepare for those leaner times.
Cash flow is not always predictable. If your supplier suddenly raises their prices, you need to have a plan to cover those costs. Same thing if your biggest client decides to default on a payment. Having a contingency plan prevents rash decisions and alleviates stress-induced reactions.
How to Improve Cash Flow
There are many things you can do to manage cash flow. Any line item on the statement of cash flows is up for improvement, from operations to investments to financing.
Start with one of these tips and see the difference in your cash flow, then move on to the next one. This is not a comprehensive list. Increasing income and decreasing expenses are only limited by your imagination.
Negotiate Quick Payment Terms
The first thing you can do is send invoices as soon as the work is complete or a product is sold. The sooner the customer receives an invoice, the sooner they can make payments.
Some businesses are in the habit of offering terms of payment that allow the customer to pay in 15, 30, 60, or even 90 days. That means your accounts receivable accounts are high, and you are waiting a long time before you have cash available to pay your bills.
Consider having the customer pay on completion of work or keep your payment terms to 15 or 30 days. Give them a concrete due date to eliminate confusion. Invoicing by email is often more efficient.
You might negotiate with the client to make partial amounts in a service-based industry. Set a milestone whereby the customer pays when work is complete. Collect a deposit upfront if you are in a business where you need to order supplies to complete the work.
Send reminders if the customer is late on their payment and follow through with either in-house or outside collection processes.
The sooner money is in the door, the better your cash flow.
Give Customers Incentives and Penalties
Tell customers that if they pay on or before the due date, they will receive a percentage off their invoice.
While you may get paid less, you could also invest the money paid early in an account that could make up the difference. You could also take advantage of incentives from your creditors to save money.
Incentives don’t have to be in the form of a discount on their invoice. You could discount them on future orders, merchandise, or gift certificates. Make this clear on their invoice so they can react to the offer.
On the other hand, make it clear to customers that you will charge a late fee if they fail to pay on time. Follow through by reporting them to a credit agency if they fail to pay at all.
Check Your Accounts Payable Terms
While working to encourage customers to pay quicker, investigate a way to delay payments to your creditors. We are not talking about skipping payments or paying late, as that will mess up your credit and make you an untrustworthy customer.
But if their terms are net 60, wait until closer to the due date to pay invoices. That way, money is in your own account, earning interest for as long as possible.
Negotiate with your suppliers for due dates that work better with your cash flow. Ask them for discounts if you order in bulk. Take advantage of incentives offered by your suppliers if you pay early.
Cut Unnecessary Spending
Investigate operating expenses to see where you can cut corners, at least until your money crunch is lessened. Look at your phone plans to see if they are optimal for your situation. Ask your insurance agent about better rates.
Sell equipment you are not using anymore—same with excess office space and inventory from that product that didn’t quite work out as planned.
Employee team-building outings or free soda in the breakroom may be worth it for morale but are they absolutely necessary?
Business credit cards are an excellent way to bridge the gap between cash inflows and outflows. They are best used in short-term situations. Carrying debt from one month to another will cost you interest and become increasingly hard to pay.
Consider Leasing Instead Of Buying
Upgrading to the newest piece of equipment may be a sound business decision that could pay off in spades in the future, and there are two ways to approach this expenditure.
You could purchase the equipment upfront with a large cash outlay and then write it off on your books as depreciation, or you could lease the equipment.
Leasing is advantageous if the equipment will outlive its usefulness before the end of the depreciation period or if the equipment for your industry is so cutting edge that you’ll want to replace it in a couple of years anyway.
Leasing can also save you money. Paying a fixed monthly fee is more budget-friendly than a significant outlay of cash all at once. Lease options may also include service contracts. If you historically spend a lot of money on repairs, leasing may be the way to go.
Only you know whether a lease over purchase is a good idea for your business.
Study Your Cash Flow Patterns
A cash flow analysis looks back at past cash flow statements and identifies income and spending patterns. You might notice that your cash flow struggles during a particular month.
You can spend months leading up to that time-saving extra cash for that lean period. Seeing trends allows you to avoid surprises and plan your cash flow. Comparing months and even years can provide valuable insights.
Maintain a Cash Flow Forecast
Creating a cash flow forecast is another way of predicting and preparing for the future. Calculate the amount of cash you make each week/month, as well as your bills and when they are due.
Similar to a budget, you will see when you need to ramp up your income or dip into a line of credit to cover your invoices. A cash flow forecast that reaches 30 to 90 days is recommended.
Consider Invoice Factoring
A way to obtain quick working capital is through invoice factoring. A third-party company (called a factor) will buy your outstanding invoice for 70-90% of its value.
If the factor collects from the debtor, they will pay you the invoice value minus their fee. Rather than sitting on accounts receivables that may never be paid, invoice factoring can put money in your pocket.
Bouncing Back From Cash Flow Problems
Cash flow problems can be discouraging but rest assured that you can turn things around with some investigation and diligence. First, look at your in-house operations. Are you being as efficient as possible?
- Look at your invoicing procedures. Ensure that you send out customer invoices that show clear payment terms with solid due dates. Send them out as soon as the job is complete or at agreed-upon intervals. As the due date looms, send gentle reminders. Enforce penalties for late payments and follow up with collections efforts. As you grow as a business, look for ways to automate or outsource this process.
- Look at your payment processes. Work with suppliers and creditors to ensure you negotiate payment terms that work with your cash flow. This might involve moving due dates to later in the month to coincide with your customer’s payments.
- Before falling short of cash, apply for a business loan, business savings account, line of credit, or business credit card. That way, you’ll have a source of cash for short-term expenses. Use these tools wisely, as you can quickly develop debt by relying too much on credit.
- Look at your operations practices. Look for vendors with better rates, sell off old inventory and equipment, consolidate operations into one location, automate repetitive processes, and look for efficiencies. Implement one of these at a time and see what a difference small changes make.
The Bottom Line
While making goods and providing services is fun, the measure of your success will be whether you can sustain your business over the long term. To do this, you must be aware of cash flow. It’s not enough to see money in your checking account.
You need to create a cash flow plan to ensure that two months down the road, you will still have money to pay invoices, invest in new growth, and take advantage of opportunities that come your way.
Otherwise, you’ll see yourself looking at a negative cash flow and scrambling for solutions. While there will be situations that you can’t predict, the best defense is a good offense. And that means being prepared.
For more insights into how to keep more of your money, be sure to check out our extensive library of articles.