Many small businesses today have trouble with cash flow. Even if a company is making profits in the long run, not having money to pay for expenses can easily lead a business in a downward spiral as operations grind to halt while angry workers start to leave your company.
Good cash flow stands for employees getting paid on time and paying expenses isn’t delayed, which lets your plan properly for the future. Vice versa, poor cash flow creates a business model that is living from invoice to invoice, chases debtors and can’t plan anything.
Several options are feasible when it comes to increasing your cash flow. Read on to learn about them.
Cut all non-required operational costs
After a certain time, every business becomes so complex that it develops many redundant and unnecessary operational expenses. This will always affect a company’s cash flow, as non-profitable operations must be paid while there is no return on investment. We can remove and lower operational expenses in several ways in order to improve cash flow.
You can either rent a cheaper office space or enable your employees to work from home (to save on overhead costs) on certain days of the week if that is possible. While there will always be a need for high-tech office equipment, like scanners and printers (particularly if they are crucial for your business), it isn’t always a good idea to spend your money on expensive furniture or ping-pong tables. Ultimately, luxury may just increase comfort a bit but won’t make your ROI any bigger.
Improving invoice collection
Small business owners are often so overwhelmed by the amount of work that they usually don’t have the time to develop a proper invoicing system. This turns into a downward spiral,\ as the slower the invoicing becomes, the slower your customers will be paying to you. In the end, a company starts to experience cash flow problems as the invoice collection process isn’t working well.
A few options can resolve this issue. You can implement NetSuite SRP solution to streamline business operations and drive profitability. A smart solution such as this one will help you generate invoices accurately and efficiently, eliminate revenue leakage, and, ultimately, improve your cash flow.
The invoice collection can also be outsourced to a professional accountant who can ensure that everything is completed fast and follow up all unpaid invoices. Or you can create sales contracts with your clients that contain a well-written payment clause. Also, submit all invoices and their support paperwork on time and always confirm they were delivered. Most late payments happen because of lost paperwork.
Paying suppliers on terms
Paying suppliers on 30 to 60 days terms is also a nice way to improve cash flow. Such a strategy will enable your business to use the supplier’s services or products basically for free, for a certain time, before having to pay them. This equals to having a short-term, interest-free loan.
In order to receive this benefit of delayed paying, you will need to first build a good credit profile. Be mindful, this will require a lot of effort, time and patience from your part. Pay suppliers always before the end of the term, a little bit earlier to be precise.
After this track record of early payments is maintained for a few months, ask for longer terms. Repeat everything and then renegotiate again after a few months. Continue until the limit is reached.
Add-on services and a reserve fund
Cash flow problems can be minimized or even avoided altogether if you build a reserve fund to pay for costs while the money is tight. This also requires patience and discipline. Every month, divert a part of your profits toward an account that will be used only in emergencies.
Consult an accountant to determine the right size of this reserve account, as this will depend on the niche you’re working in, your cash flow patterns, the size of your business and risk tolerance.
You can also offer cheap and quick add-on services to your existing customers, as they can easily increase your income. How? Through residual income that doesn’t require a lot of extra efforts from your part. For instance, maybe you can make a special arrangement with some other company to deliver added services, which then you sell to your customers for a bigger price.
There are also other options for reducing cash flow we didn’t have time to write about. For instance, you can use affordable, targeted marketing or implement flexible payment incentives and terms. Find those that are suitable for your business, and your cash flow will improve in no time.