Effective cash flow management is critical for the survival of any business – be it a startup, or an established enterprise. Keeping the cash flow up in the positive digits is paramount for continued growth of any business.
A positive cash flow signifies that your business is gaining capital. While a negative cash flow means that your business’s cash reserves are depleting.
Even a business that appears profitable on a surface level can succumb to cash flow problems – because an adequate cash flow system is far more than growing sales and ascending profits.
To attain a healthy cash flow in any business, your cash outflows should be less than your cash inflows. But what does that really mean?
It means that your receivables (money from a sale that is yet to be collected) should be well within your reach before your payables (debts etc.) are due. It sounds elementary but in reality, it can prove to be quite difficult to pull off.
To improve your business cash flow, it’s imperative to regulate your expenses as much as your sales. For that to happen, your operations, finances, and marketing have to run smoothly.
In this article, you will find the best strategies your business needs for increasing cash flow.
1. Educate Yourself
Usually, business owners are high on creativity but would run out of ideas when it comes to managing business accounts. Mostly, it is due to the lack of a proper education in accounting best practices.
A solid foundational education in the field can help you overcome these shortcomings. To educate yourself, invest in programs like Online Accounting Master’s Program, and learn about effective cash flow management and the crucial role finances play in a business’s success.
Business owners can learn a great deal about cash inflows and outflows from these programs. This knowledge may prove to be indispensable for your business’s financial health later on.
2. Send Invoices Out Straight Away
The quicker you send your invoices out, the faster the receivables pour in – it’s that simple. Make sure that your invoices are easy to read as well.
Make a special mention of the due date—multiple times if you have to. You can also consider making it bold so that it’s hard to miss. The quicker your customers receive your invoices, the faster you’ll get your payments.
Make the payments process convenient for both your customers and yourself by clearly stating the acceptable payment types and late payment charges, if any.
Consider switching to a cloud-based accounting app if your current invoicing system moves at a slower than preferred pace. Such apps are great at automating the invoice system according to your business needs.
3. Collect Timely Payments from Your Customers
It’s one thing to send the invoices on time, it’s entirely another to get your customers to pay their invoices on time. Incorporate the following techniques to encourage your customers to pay quickly:
Remind Them Frequently: Follow up with regular invoice reminders. Invoice reminders can be in the form of text or email. You can also consider calling them if the due date has passed to give a more direct prompt.
The ideal strategy is to remind them a few days before the payment is due, the day the payment is due, and also a few days after the due date if the invoice has still not been paid.
Penalize Late Payment: Place a penalty on late payments to compel your customers to pay on time. Although stern, it is a very practical way to convey that you have a strong stance regarding business invoices.
Late penalty policies may vary according to different industries. Take a look at other businesses in your industry to find out an adequate penalty percentage.
Reward Customers Who Pay Early: A brilliant way to encourage your customers to pay earlier than the due date is to provide them with incentives.
For example, if you offer a deal or a discount to customers who pay their Net 15 (due to be paid within 15 days) invoices within a week, then you automatically increase the likelihood of customers willing to pay earlier than the due date.
Improve your cash flow by getting early payments from your customers, through the steps mentioned above.
4. Cut out Unnecessary Operational Expenses
A business is as much about optimizing operational expenses as it is about generating sales. Streamlining business processes and cutting out unnecessary expenses can save tons for a business.
Some of the best ways to cut out unnecessary operational expenses are mentioned below:
Liquidate Old Equipment and Inventory: Maintaining business equipment and inventory make for one of the largest business expenses. Both have the power to generate major sales, but if they’re sitting idle for a long time, their value can quickly turn negative.
Take a careful look at your inventory and equipment list. If you find any items that are not selling quickly enough or equipment that consumes more than it produces – consider liquidating it. It can be quite hard to liquidate some of your assets but any amount of money is better than no money at all.
Limit Production Waste: 20% of industry capital is wasted each year in the manufacturing process. That amounts to up to $8 trillion annually.
Recognize the waste potential of your business and take effective steps in limiting it to a minimum. Not only will it aid the environmental cause, but it will also cut your expenses.
Invest In Durable Equipment: Old equipment tend to consume more in repairs than the value it generates. The latest and most durable equipment can be quite expensive but most of the time, it’s very well worth it.
5. Negotiate With Suppliers and Vendors
Another key to improving your cash flows lies in the art of negotiation. Purchasing inventory is an unavoidable step for many businesses. But it does not have to be an expensive one.
Negotiate with your suppliers and vendors to find out if they are willing to offer any deals regarding payments, ease in time, or inventory items.
The health of your business’s cash flow depends upon effective operational and financial management. Educate yourself on the best management practices, optimize your invoice system, cut unnecessary costs, and negotiate with your suppliers to effectively increase your inflows and decrease your outflows. Incorporating all these steps in your business and regularly updating your business plan will keep it on a steady track toward profitable growth.