If you are an entrepreneur and your sales are growing and profits are increasing from one year to the next, you are headed in the right direction. However, don’t rest on your laurels just yet. Even if your business is growing and profitable, it’s possible to get knocked down with cash flow problems if your financial, operations and investing activities are not efficient.
For example, when payables are due before receivables come in, this is a cash flow issue because you can’t pay your bills. This can eventually lead to bigger issues, such as being unable to make payroll and creditworthiness questions. If you want to increase your cash flow, consider implementing some of the following.
Defining Cash Flow
Cash flow is defined as the amount of net cash flow in and out of the business. The success of the business is determined by the ability to create positive cash flow through normal business operations. Cash flowing in is comprised of revenue from sales of goods/services as well as investment income. On the other hand, cash flowing out is comprised of debt payments and expenses.
3 Types of Cash Flow
There are three primary types of cash flow:
All of these will appear as entries on the Statement of Cash Flows on the financial statements of your business.
10 Ways to Improve Cash Flow
There are several ways that you can improve cash flow as a business owner. We’ll explore 10 of those below.
Lease instead of buying
Leasing instead of buying equipment, real estate, and supplies is typically more expensive, so it seems strange to say that leasing is better- especially if you’re more focused on your income after expenses are paid. However, unless you have lots of cash stockpiled, you need to maintain cash for your daily operations.
Leasing allows you to make small payments, which improves cash flow. The best part is, that these lease payments are a business expense and can be written off on taxes.
Offer early payment discounts
Let’s face it, we all love a good incentive,, and by offering a discount to customers who pay ahead of time, create a win/win for everyone. They get a discount on their product/service, and you get the cash in early, which improves your cash flow.
Conduct credit checks on customers
If your customer doesn’t want to pay cash, you need to make sure to conduct a credit check before extending them credit. If they have poor credit, you can be sure that you probably will not get paid on time. As much as you may want to make the sale, late payments are detrimental to your cash flow. If you choose to still make the sale to a customer with questionable credit, make sure you add a high-interest rate.
Form a buying co-op
You’ve heard the saying that there’s power in numbers- and it’s true. Connect with other similar companies who are willing to pool their funds to get lower prices from suppliers who give discounts to businesses that buy in bulk.
Check your inventory
Take a look at your inventory. Make a list of things that you are buying that is not moving like the others. These items are tying up a lot of your cash, which ultimately hurts cash flow.
Then, when you’re ordering more inventory, instead of buying more of the things that take longer to sell or don’t sell at all, buy things that you know will generate cash. Then, even if you have to sell it at a discount, get rid of what you have.
Immediately send out invoices
When you immediately send out invoices, you’re more likely to see receivables come in quickly. Be sure to understand how to create a good invoice. You want them to be clear and easy to read. Make sure the due date is listed in a few places and highlighted somehow (bold, colored, etc). Make sure you also clearly state the payment types that you accept and if you do charge late fees, make sure that information is clear as well.
Pay bills electronically
When you pay your bills electronically the morning of the day it’s due, you improve your cash flow. Another thought is to use a business credit card to make payments because they often offer a grace period, which gives you time to increase cash flow. In some cases, you can get cashback from these cards. However, be careful that you don’t rack up too much debt.
Pay suppliers less
Keep a line of communication with your suppliers open at all times to increase your chances of negotiating better terms. Offer them early payment if they are willing to give you a discount. As a business owner, you must learn to negotiate, as it could potentially help you get better deals from your suppliers.
Use a high-yield savings account
A high-yield savings account will give you liquidity, while also improving your cash flow, allowing you to earn more on the money you stash away. The best ones offer rates as much as 25 times higher than the national average.
This is something that scares a lot of business owners. They worry that it will scare customers away and they will lose sales. However, there’s nothing wrong with experimenting to find the ideal price. The more you can earn on a product/service, the greater your cash flow.
Cash flow is critical for the success of your business. Healthy cash flow is due to smooth, efficient operations within your business. These 10 things should help improve your business cash flow. In addition, contact Sterling Capital Consulting to learn more about entrepreneurship.