No business owner, especially a small business owner, is free from worry about cash flow. That's particularly true in the wake of COVID-19. Even now, with consumer demand surging, business owners are dealing with rising operating costs. That makes managing cash flow more important than ever.
Not convinced? Consider this. According to an often-cited U.S. Bank study, 82% of small businesses fail due to cash flow problems. That's for good reason. Without sufficient cash on hand, you can't keep your staff paid, inventory stocked, or the lights on. But there is good news. There are several strategies small business owners can employ to shore up cash flow. Here's a look at 10 of them.
1. Collect receivables before payables are due.
In a perfect world, customers pay you in cash on the spot. In the real world, getting paid can take a while, which can put pressure on cash flow. But small business owners don't have to sit idly by. They can offer customers discounts to pay their bills early. Before you go down this road, make sure you can afford it. You don't want the discount to hurt your profit margin.
2. Send invoices on the day of service.
As a small business owner, you end up wearing many hats. One minute, you are selling a product or providing a service. The next minute, you are billing customers and screening employees. Managing everything is a challenge. Often, invoicing falls to the wayside and cash flow suffers. The longer it takes to send a bill, the longer it takes to get paid. Avoid late payments by sending an invoice immediately after making a sale. Automating the process with software like Freshbooks, which offers an instant invoicing feature, makes it even easier. Learn more in our complete FreshBooks review.
3. Raise prices.
Inflation is at a 30-year high. Companies are paying more to get products, and workers, into their stores and businesses. As the cost of operations increases, cash flow decreases. But companies don't have to shoulder that cost alone. They can raise prices to protect their profit margins. Consumers seem willing to absorb the increases, at least for now. If you're upfront and honest about why you are raising prices and by how much, you should be able to hold on to your customers.
4. Streamline inventory management.
Proper inventory management is essential for preserving cash flow. Without it, you may order too much or too little. One way to streamline inventory management is to integrate your inventory system with your point-of-sale (POS) system. Many POS software providers offer inventory features and integration. In some cases, that includes the ability to set alerts when inventory gets low and automatically reorder. When reviewing the best POS vendors for small businesses, we found many that offer inventory features and functionality.
5. Source additional suppliers.
If the supply chain chaos taught us anything, it's the need to have more than one supplier. Not only does doing so increase the odds of getting inventory, but it could also save you money. After all, you won't know if other vendors offer better rates unless you shop around. Make sure you know all the major suppliers in your industry and get a quote from all of them. You may be surprised by your savings.
6. Consolidate your debt.
Cash flow management can be difficult, especially if you have many bills due each month. This is particularly true when you're dealing with high-interest credit card debt. One way to improve cash flow is to consolidate that debt. The aim is to have one monthly bill at a lower interest rate. Many lenders offer term loans that you can use to consolidate debt.
7. Manage your accounts payable process.
Few things hurt cash flow more than not staying on top of your accounts payable and accounts receivable. If you don't know how much money is coming in and going out, you'll have a hard time managing your cash flow effectively. If you track your invoices, you'll ensure you don't miss payments. Tracking can also help you negotiate better terms with vendors, which will free up cash flow.
8. Try crowdfunding.
Crowdfunding platforms offer business owners a means to pitch their ideas to a large number of small-dollar investors. Create a profile and build a campaign showcasing your concept to potential investors.
9. Use invoice factoring or short-term loans.
Invoice factoring is a type of debtor finance that allows you to sell your accounts receivables to a third party. You'll get immediate cash and won't have to wait 30, 60 or 90 days to receive a customer's payment. Keep in mind that factoring companies base their funding decisions on the creditworthiness of your business's customers. The better your credit score, the lower the interest rate you'll pay.
10. Understand your cash flow statements.
An easy way to free up cash flow is to make sure you understand your cash flow statements. That means keeping an eye on several cash flow entries, including the following:
- Opening balance
- Receipts from customers
- Payments to suppliers
- Operational income
- Taxes paid
- Interests earned
- Salaries and wages
If you have an idea of cash coming in and going out, you'll be able to identify ways to reduce expenses to shore up more cash.
Improving cash flow has more benefits than being able to pay your employees and to afford goods and services. It's the fuel that keeps your business going, and what prevents your business from going under during unforeseen circumstances. Follow the tips above and you'll be on your way to strengthening your cash flow and improving operations.
Jennifer Post contributed to the writing and research in this article.