According to Hal Shelton, angel investor, SCORE mentor, and author of the best-selling The Secrets to Writing a Successful Business Plan, one of the primary reasons companies go out of business is “cash flow mismanagement.”
It can be challenging for small businesses to get a grip on their cash flow, but it’s essential you do so. After the year we’ve all been through, you may feel like the situation is out of your control. There are ways you can better manage – and even boost – your cash flow. Here are a few.
How to Increase Your Cash Flow
1. Monitor and Document the Process
You can’t manage, improve or increase your cash flow unless you keep track of it. Numerous accounting programs, such as QuickBooks, Sage Intacct, and others, help you monitor your cash flow. (Using a cloud-based accounting system makes it even easier to stay on top of it.)
The key, of course, is to look at your accounts receivables and payables regularly. This enables you to know how much cash is coming in and how much needs to go out at all times. Plus, if you use an automated, cloud-based system payment processing system that integrates with your accounting program, such as Bill.com, you can manage your receivables and payables in one place.
It just takes a quick glance at your Bill.com dashboard to see a record of the money that comes into your business each month—your receivables— (payments from customers, interest, loan proceeds, etc.) and flows out of your business each month—your payables—(rent, payroll, cost of inventory or materials, etc.).
Shelton says there are several common mistakes small business owners make when it comes to managing cash flow. Many falsely believe they only need to prepare a cash flow projection once a year at budget time. Shelton says instead, “you need to project cash flow every month and [create] a rolling 12-month forecast.” In tough times, if you’re worried about making payroll, for example, Shelton recommends you do a weekly cash projection.
Your cash flow projection is based on your past cash flow statements. If your business has seasonal cash ebbs and flows, start with a year of cash flow statements; if your cash flow tends to be steady, begin with three to six months of statements. (Again, this is a very easy exercise if you’re looking at your Bill.com dashboard.)
Then, depending on your current situation, compare your cash flow projections (for the week or month) to your actual cash flow statement and adjust your projections accordingly.
Don’t make the mistake of thinking this is not your job. Shelton says another common error small business owners make is thinking, “cash flow is the accountant’s job.” As Shelton says, “Accountants report on past activities. CEOs make things happen going forward and need to have top of mind what the cash impact of their decisions/actions will be.”
2. Cut Costs
If cash is tight, or you’re worried it soon will be, look at your payables to see where you can cut back. Is your rent too high? If you’re actually occupying office or retail space today, you may be able to negotiate with your landlord for a rent reduction since so many companies are operating remotely.
Do you actually need to be in an office, or can you switch to virtual operation? This can save you a lot of money on basic overhead costs.
Are you reading the newsletters, newspapers, and magazines you’re paying for? If not, unsubscribe. Can you save money by switching to accessing this information online?
Are you paying annual dues to membership organizations? Are you benefitting from being a member? If not, consider dropping your membership.
Have you checked your insurance policies lately? Are you getting the best deal? Can you get the same coverage for less cost? Shop around before you recommit.
3. Closely Examine Your Payment Process
Switching to an automated payments system like Bill.com saves you time and money. Bill.com says their clients get paid “2x faster” by utilizing digital invoices, automatic reminders, and electronic payments.
Can you ask clients/customers to pay an initial upfront deposit and the rest when you complete the project? If the project is large, consider dividing it into stages and bill for partial payment upon completion of each step.
4. Negotiate / Incent Better Payment Terms
Are your steady customers paying you net 60? Can you bump that up to net 30 or even less by offering discounts for early payments? Of course, do the math first to make sure getting paid early is worth collecting less money.
If your steady customers pay you every month, can you convert them to an annual contract by offering a discount off the monthly price?
5. Apply for a Line of Credit
Business lines of credit are great to fall back on if you do encounter a cash flow crunch. You don’t pay anything until you use the money. But the best time to apply for a line of credit is before you need it.
6. Consolidate or Renegotiate your Business Debt
If you owe money now, talk to your lenders. You may be able to negotiate for a lower interest rate or extended payment terms, which can help boost your cash flow. Many lending institutions have created special programs during the COVID-19 pandemic to help struggling businesses hang on.
7. Sell Business Equipment You’re Not Using
Do you have equipment you no longer need? Think about selling it to help increase your cash flow. Depending on your industry, you may be able to generate cash flow by selling your equipment on Amazon or eBay. Your trade association may have a place to advertise your excess equipment.
8. Lease, Don’t Buy New Equipment
If you’re in the market for new equipment, technology, or a company vehicle, consider leasing it instead of purchasing it outright. That way, you get the most up-to-date versions without outlaying a lot of cash up-front.
9. Get Rid of Excess Inventory
Are you a retailer or wholesaler with extra inventory? Don’t store it or let it take up valuable floor space. Have a clearance sale, both in-store and online. If you’re still stuck with products, contact a liquidator. You won’t get a lot of money, but something is better than nothing. Or donate leftover merchandise to a charity or other nonprofit. You won’t earn money but check with your accountant to see if you can get a tax write-off.
10. Use the Business Credit Cards that Best Suit Your Business Needs
Having a rewards business credit card can boost and increase your cash flow by allowing you to pay for purchases with the points or miles (for airline cards) you’ve earned. (I’ve bought computers this way.)
Also, look for cards with low interest rates and annual fees.
11. Check Your Pricing Structure
When’s the last time you raised your prices? Before you do, check the prices your competitors are offering. Are you in line with those, or have you been too worried about market conditions to raise prices?
There are segments of the economy that are still booming. Depending on who you sell to and what you sell, you may be able to charge more and not lose any business.
12. Factoring or Invoice Financing
If you need a quick, short-term cash infusion, consider factoring or invoice financing. There are advantages and disadvantages to doing this, so be sure to check with your accountant to make sure it makes sense for your business.
The best time to plan for a cash shortfall is when you’re not facing one. Shelton says every business needs a “Plan B” to fall back on. Create one now. Ask yourself, if you were faced with a cash shortage, what would you do? It’s easier to lay out the possibilities now, rather than in the heat of the moment.
Most businesses experience ebbs and flows of income. Try to save money in the good times, so you have it when you’re experiencing a cash crunch.