82% of small businesses fail due to cash flow issues. These cash flow problems arise when your business needs more liquid cash to fulfill its obligations. If your cash outflows exceed the cash inflows, you might struggle to cover your debts and other business expenses. Cash flow issues may be due to low-profit margins, invoicing and payment collection problems, lack of cash reserves, expensive borrowing, uncontrolled business growth, excess inventory, seasonal demand changes, and inaccurate bookkeeping and forecasting practices.
These problems can risk your business’s health. However, learning how to manage your cash flow can help enhance business success and growth. This article outlines nine small business cash flow management tips.
1. Work with a chief financial officer (CFO)
No business is immune to cash flow problems. And since proper cash flow management requires specialized skills, hiring a CFO would be the best option. A CFO’s primary responsibility is optimizing a business’s financial performance, including its liquidity, reporting, and return on investment. Working with a CFO can help your business manage its cash flow efficiently while meeting its financial commitments. Running a business involves many expenses. So your CFO will help ensure that these expenses never exceed cash on hand at any time, preventing business failure.
A good CFO will give you a clear picture of your business’s future cash availability, help manage spending, identify possible causes for cash shortage, address cash flow problems before they occur, and ensure you have enough cash to run a profitable company. Since hiring an in-house CFO can be expensive for a small business, collaborating with a part-time or virtual CFO would be financially wise.
2. Minimize your expenses
Minimizing business expenses can be challenging. However, your short-term business survival plan puts the non-essential and essential expenses on the spot. Based on your situation, some creative changes can help you return to positive cash flow. Consider discontinuing non-essential services until your finances improve, reduce or cancel premium services, reduce operating costs, and more.
3. Negotiate accounts payable
Negotiating or minimizing business expenses is an excellent way to maintain positive cash flow. Having more working capital helps you prioritize expenses while preventing cash flow issues from getting out of hand. Start with the vendors and utility providers you have good relationships with.
Be open and negotiate flexible payment terms and alternatives. If your cash flow is severely strained, make strategic payments. You may also ask your suppliers for discounts for bulk purchases. If your vendors and suppliers aren’t willing to renegotiate, shop around to determine you’re getting the best deals and shift where necessary.
4. Send out invoices immediately
Your business’s success and growth depend on sales. However, you will only get paid on time if you send your invoices promptly. Ensure you’re always on top of customer invoicing because the faster you send the invoices, the quicker you get the cash. If the existing invoicing procedure is tedious, switch to a cloud-based accounting system with easy-to-make invoices. With software such as QuickBooks Online, you can access excellent invoicing capabilities to accelerate your invoicing procedure and increase your cash flow.
5. Increase prices
Increasing prices is a great way to maintain positive cash flow. Nevertheless, before hiking your prices, consider:
- How much your competitors are charging
- If inventory or equipment prices have increased
- The staffing your services or inventory assembly requires
- Whether the current prices compensate for the effort and time you put into creating your products
- If your prices are too low or your products come off as valuable or cheap
The goal is to keep a balance between maintaining competitive pricing and ensuring that you and your team are fairly compensated for your work. If your prices are currently okay, it’s essential to monitor current market trends and pricing and adjust your pricing accordingly.
Failure to change your prices to account for increased costs can be disastrous for your business. While you may want to offer competitive pricing to your customers, hiking prices as needed is essential to enhance cash flow and prevent business failure.
6. Get your customers to clear their invoices on time
While getting your customers to pay their invoices on time may seem challenging, you can employ tricks to increase the possibility of quicker invoice payments. Consider sending payment reminders a day or two before the invoices are due, on the due date, and a few days later. You may also offer incentives to customers who pay before a specific period.
Having a solid invoicing policy is crucial to successful invoicing. Pick a consistent timeline for when invoices are due and stick to it. Charge a late payment penalty for those who go beyond the due date. If these tactics don’t work, consider invoice factoring to solve your cash flow issues.
7. Pay vendors on time
Being strategic about when to pay vendors can benefit your business. If your vendors give discounts for early payments, pay within the required timelines to save money. Where discounts aren’t available, pay during the most favorable period for your business.
For instance, suppose your bills are due on July 1st. Your business’s cash flow statement indicates that June is slow, but July has a higher sales history. Consider paying your bills on the last day they’re due to record positive cash flow for June. If you require more time to pay your bills, consider using a business credit card to pay over a period of time instead of all at once.
8. Liquidate slow-moving inventory
Conduct an inventory check and prepare a list of the items that aren’t moving at a similar pace as the rest or have a hard time selling. These things use a lot of cash and can hurt your cash flow, so consider liquidating them. For your business to profit, you should ensure the inventory you’re stocking up is selling. Assess your sales patterns to determine your busy and not-so-busy sales periods and order your inventory based on your findings. This will help ensure your business maintains a positive cash flow.
9. Open a savings account
A business savings account offers you liquidity while building your cash position. Opening a savings account, primarily a high-interest account earns you more interest rates than the national average. This means you’ll earn more on your savings.
Endnote
Proper cash flow management is crucial for the success and growth of any business. Use these tips to manage your small business cash flow and avoid financial disasters.
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