Have you ever struggled with tight cash flow?
If you’re a business owner, you know that cash flow is the lifeblood of your company. Without it, you wouldn’t be able to pay your employees, purchase inventory, or keep the lights on.
So, what do you do when cash flow is tight and you’re struggling to make ends meet?
Read on for 19 strategies to improve cash flow within your business.
Tight Cash Flow: Business Cash Flow Problems
Business cash flow problems can be a major headache for any business owner. When cash flow is tight, it can be difficult to meet payroll, pay bills, and keep the business afloat.
A business needs cash to pay its bills, expand its operations, and make profits. When a business doesn’t have enough cash on hand to cover its expenses, it can quickly become insolvent.
There are a number of reasons why a business might have cash flow problems. Maybe the company is growing too quickly and isn’t generating enough revenue to cover its expenses. Or maybe it’s been hit by an unexpected setback, such as a natural disaster or the loss of a major client.
Whatever the reason, cash flow problems can be devastating to a business if they’re not addressed quickly and efficiently.
The video below provides a refresher on the basics of cash flows:
While there are many potential causes of cash flow problems, there are also several solutions that can help get you back on track.
Let’s dive in.
19 Ways to Improve Cash Flow in Your Business
1. Get a Clear Understanding of Your Cash Flow Situation
This means taking the time to get organized – you need visibility where your money is coming from and where it’s going. To get a better picture of your cash flow, track all of your income and expenses for a few months.
Make sure you have a process in place to track and manage invoices and payments. This will give you a good idea of your company’s spending patterns.
2. Can You Remove Unnecessary Overhead and Spending?
Take a closer look at your spending. Are there any areas where you can cut back?
There may be some areas of your business that are less essential than others. Do you really need that high-end coffee machine in the office? Can you get by with a cheaper internet service?
If possible, try to reduce or eliminate spending in these unnecessary areas. This can free up cash that can be used to cover other expenses or invest in growth.
3. Send Invoices Immediately
This one is simple: if you don’t invoice, you won’t get paid. When you don’t invoice people right away, there is a longer lag time for the money to come in, which can strain your finances.
Make sure you’re invoicing promptly and correctly (as soon as the purchase is made or work is completed). If you bill customers quickly, you’ll likely be able to expedite the payment process.
Once you send an invoice, follow up to remind customers when invoices are due. I recommend sending an automated email reminder a few days in advance of the due date. If someone is late, build in additional reminders to keep it top of mind.
4. Are You Offering Too Much Credit to Customers?
Another reason cash flow might be an issue in your business is because you’re offering too much credit to customers.
Review your credit policy to make sure you’re not giving too much leeway to customers. It may be necessary to shorten your payment terms or require a deposit before starting work.
5. Give Customers Incentives and Penalties
One way to encourage timely payments is to offer your customers discounts for paying early or penalties for paying late.
A few ideas on how to do this:
- Get Paid Up Front: if possible, try to get paid up front for your products or services. This could mean requiring a deposit before starting work, or charging for services in advance.
- Discount: offer a discount for customers who set up automatic payments, which would take the guesswork out of when they need to make a payment each month. This could be a percentage off their total bill or discount they pay within a certain number of days.
- Offer Multiple Payment Options: another way to encourage timely payments is to offer your customers multiple payment options. This could include online bill pay, setting up automatic payments, or even taking cash or checks. The more options you offer, the more likely it is that your customers will find a payment method that works for them and make timely payments.
- Late Fees: institute a late fee penalty if customers pay after the due date.
6. Improve Your Collections Process
To expand on the above theme, make sure you have a strong collections process in place to encourage timely payments.
This will help you to quickly and efficiently collect payment from customers who are delinquent on their invoices.
You could consider building in a systematic process to follow up with customers who haven’t paid yet. If necessary, you may want to hire a collections agency to help you get paid.
Another option is to invest in accounts receivable insurance, which can protect you from losses if customers don’t pay invoices on time.
7. Consider Invoice Factoring
This is a type of financing where you sell your outstanding invoices to a third party at a discount in exchange for immediate cash. Usually the third party will buy an invoice for 70-90% of its total value, and then go after the client for payment.
Here’s a hypothetical scenario to illustrate how this works:
- Let’s say you have a $20,000 invoice
- An invoice factoring company agrees to buy your invoice for $19,400 in cash — $20,000 minus a 3% factoring fee ($600).
- The invoice factoring company advances 85% of the invoice (or $16,490) within a few days.
- The factoring company then collects the invoice when due and provides the remainder of the balance to you ($2,910).
This can be a good, low-risk option if you’re struggling to make ends meet and need a quick infusion of cash. Just be sure to factor in the fees associated with this type of financing (typically 1-5%).
8. Improve Terms with Vendors and Suppliers
Examining terms with vendors and suppliers is often low hanging fruit. Here are a few ideas:
- Ask for more favorable (longer) payment terms. This could involve extending the payment window to 45 or 60 days. This gives you more time to generate revenue and keep cash on hand.
- Negotiate better credit terms and prices: if you have a long-term relationship, you might be able to get additional discounts or flexibility
- You might be able to get a discount for paying early. If your vendor doesn’t offer a discount, pay when it’s most advantageous for your business (i.e. pay on the last allowable day).
- See if you can purchase inventory in bulk for a discount.
- Shop around: if you are not able to renegotiate price or terms, it’s worth exploring alternative vendors and suppliers to see if you can get a better deal.
9. Consider Raising Prices
One of the biggest mistakes businesses make is pricing their products or services too low. While it might seem like a good idea to attract more customers, lowering prices will cripple your bottom line in the long run.
Instead of competing on price, focus on differentiation and ways to stand out in the marketplace. Look to improve your offer (increasing the perceived value to your customers) so you can charge premium prices.
Testing a price increase will allow you to gauge how price elastic your customers are, and you might be surprised with how few of your customers leave (and massive increase to profits).
10. Consider Using Lines of Credit
Lines of credit can be a great way to manage cash flow. They can provide you with the funds you need when you need them and help you avoid costly overdraft fees.
A line of credit gives you flexibility since you can draw on the funds as needed and only pay interest on the portion that you use.
If you have good credit, you can use credit cards to finance short-term cash flow needs. Just be sure to pay off the balance in full each month to avoid paying interest.
11. Maintain a Cash Flow Forecast
A cash flow forecast is a document that shows your expected incoming and outgoing cash for a specific period of time (i.e. weeks, months, or quarters).
Forecasting your cash flow will give you visibility into upcoming surpluses or deficits so you can adjust accordingly. If you have clarity into upcoming shortfalls, it gives you the ability to take proactive action.
12. Create an Emergency Fund
Unexpected expenses are one of the hardest things for businesses to deal with because they can often derail even the best-laid plans.
To help avoid this, create an emergency fund that can be used for unexpected expenses and low periods. This extra cash on hand provides a buffer to help you weather any storms and seasonality within your business.
13. Put Idle Cash to Work
If you have cash that is just sitting in your business bank account, consider putting it to work through a process called sweep accounting.
Sweep accounting is when you automatically transfer any idle cash above a certain threshold into a high-yield savings account or money market fund. This allows you to earn interest on your cash while still having quick access if needed.
14. Invest in Business Insurance
Business insurance can help protect your business from unexpected events that could cause cash flow problems.
There are a number of different types of business insurance, but some common ones include property insurance, liability insurance, workers’ compensation, and product liability insurance.
Having the right type (or combination) of business insurance can help you avoid financial ruin if something unexpected were to happen.
15. Check Eligibility for Government Loans/Grants
If your business is involved in certain types of activities or experiences a hardship, you may be able to qualify for assistance from the government. This can provide you with the cash you need to cover expenses and help you grow your business.
One option would be to apply for the Small Business Administration’s Economic Injury Disaster Loan (EIDL). To be eligible, you must demonstrate that your business has suffered financial hardship due to the disaster. The loan can be used to cover working capital needs, such as inventory and accounts receivable.
16. Make Your Business Processes More Efficient
One of the best ways to improve your cash flow is to improve operational efficiency within your business. By streamlining your processes, you can free up cash that can be used to invest in other areas of the business.
Common areas where businesses can become more efficient include:
- Enhancing your management operating system
- Inventory management
- Accounts receivable/accounts payable
- Customer service
- Product development
- Finding more opportunities to sell to existing customers and maximize CLV
- Order fulfillment
- Employee productivity
- Examining the profitability of your product portfolio
17. Improve Inventory Management
If you sell products, then you need to make sure you’re managing your inventory properly. Make sure to keep close tabs on your inventory levels.
A couple things to consider:
- Are you paying too much for inventory? Make sure you’re getting the best price possible for the products and materials you need to keep your business running.
- Are you carrying too much inventory? Carrying too much inventory ties up cash that could be used for other purposes. Review your inventory levels and see if there are ways you can streamline your operations.
- If the inventory you’re purchasing isn’t selling, consider liquidating old inventory. At this point, it’s best to cut your losses and at least get something in return.
18. Consider Leasing Equipment (Instead of Buying)
If your business requires certain equipment or vehicles, you may want to consider leasing instead of buying. Leasing can provide many benefits, including:
- Reduced upfront costs and short-term financial burden
- Protection against obsolescence
- Flexibility to upgrade as needed
- Often allows you to qualify for tax credits and/or deductions
Just be sure to do your homework and understand the terms of any lease agreement before signing.
19. Consider Getting a Business Loan
If you’re in a very challenging situation, another option is to get a business loan. If you have good credit, you may be able to qualify for a business loan from a bank or other financial institution. This can provide you with the cash you need to cover expenses and help you get through a tough period.
Make sure you have a strategy for repayment and keep an eye on debt levels to avoid being overleveraged.
Famous Companies with Cash Flow Problems
If you’re struggling with cash flow, you are certainly not alone. Here are a handful of high-profile corporations who might sound familiar:
1. General Electric: In 2009, GE was forced to cut its dividend by half and sell off assets due to poor cash flow.
2. Kodak: In 2012, Kodak filed for bankruptcy as it struggled to adapt to the digital age and generate enough cash flow.
3. JCPenney: In 2013, JCPenney nearly ran out of cash and had to take out a $2.25 billion loan to stay afloat.
4. Sears: In 2018, Sears filed for bankruptcy due to years of declining sales and poor cash flow.
5. Toys “R” Us: In 2018, Toys “R” Us filed for bankruptcy due to heavy debt and poor cash flow.
What do these companies have in common? At one point or another, they all experienced severe cash flow problems.
While each company’s situation is unique (and there’s only so much within your control), there are some general lessons we can learn from their experiences:
- It’s critically important to have a good handle on your finances and to understand where your cash is coming from and going.
- Be proactive about managing your cash flow so you can limit any surprises down the road.
- Have a plan in place for how you will manage during tough times. This could include cutting costs, finding other sources of income, or restructuring debt.
Conclusion
As we covered, cash flow is the lifeblood of any business. Without it, you’d quickly grind to a halt.
If you find yourself in a situation where cash flow is tight, don’t panic. Remember, even the most successful businesses have had to deal with cash flow problems at one time or another.
There are a number of reasons why this might be happening, and there are also a number of things you can do to improve the situation.
If you are currently having cash flow issues, take a close look at the strategies above and think about which will have the highest impact and be feasible for you to execute. The key is to stay focused and take action strategically.
