82 percent of small businesses crash out of the market because of cash flow problems. This is the #1 reason behind the failure of many small enterprises.
Clearly, cash is king. And if you don’t give it the respect it deserves, your business will close shop sooner.
It’s for this reason every small business owner must develop and implement a sound cash flow management strategy. At all times, you should have more money coming in than going out. However, achieving this is easier said than done.
Worry not, though! Continue reading to learn how to increase cash flow and keep your business operational.
Why Is It Important to Improve Cash Flow?
If you’re an entrepreneurship rookie, you might not have a clear picture of why it’s important to improve your cash flow. Here are a couple of reasons:
Settle Business Bills on Time
Every business has bills to pay.
If you don’t own your commercial premises, you must pay the rent every month or quarter or as agreed with your landlord; otherwise, you’ll face eviction. There are utility bills such as electricity, internet, and cleaning and security services. You must also pay your employees, suppliers and other vendors.
Without positive cash flow, you’ll not be able to settle business bills on time. Some vendors/providers might withdraw their services, effectively crippling your business. If your business is web-based, for example, slacking on your server bills can see your business website taken offline.
Maintain Your Creditworthiness
From time to time, you’ll need to go in for a business loan. Prospective lenders will ask to look at your cash flow statement to establish whether you deserve the amount you’re borrowing or you’ve got the ability to service the loan.
Strong cash flow improves your business’ creditworthiness. You’ll get quick loan approvals and you can even qualify for a healthy business line of credit.
On the other hand, poor or negative cash flow is a sign the business is in financial pressure or your business model isn’t working. In the eyes of lenders, you’re a high-risk customer. Your credit applications will certainly be rejected, or you’ll face higher interest rates.
Make Your Business Attractive to Investors
Like lenders, investors also use cash flow statements as an indication of a business’ commercial viability.
If your goal is to take your startup through funding rounds, a solid cash flow will improve your chances of securing the money at good valuations.
You’re in business to turn a profit, from which you can pay yourself, right?
But how will you be able to take a salary or draw money if the business has negative cash flows? So, if you want to compensate yourself, you better work toward ensuring your business has strong cash flow.
Now that you know the benefits of improving business cash flow, let’s look at how to actually pull it off.
Start Off with Adequate Capital
Your quest to maintain positive cash flow starts long before you make your first sale. It starts when you’re setting up the business.
You see, many small businesses fail because they run out of capital. Their owners either started off with inadequate capital or the businesses weren’t securing sufficient revenues to cover expenses.
You can avoid this problem by securing adequate startup capital. Here, adequate doesn’t mean just enough to cover your startup costs. It should also be able to last for as long as it’ll take the business to start turning a sustainable profit.
You’re probably wondering, “How will I know how long it will take my business to become profitable?”
In truth, you can’t know. Some businesses take a couple of months to make a profit. Others take several years.
The smart thing to do is perform extensive market research. This will help you establish a near-accurate estimate.
Another thing is to err on the side of safety. It’s far safer to secure more than adequate capital when starting up, or at least ensure you have access to extra cash should things not pan out as forecast.
Rent or Lease Instead of Buying
Depending on the nature of your business, you might need commercial space, equipment, furniture, and other items.
You have two options: rent/lease or buy.
In most cases, buying is a savvier option. It’s cheaper and you get full ownership. You can use these assets as collateral for a loan.
However, in the context of improving cash flow, it’s smarter to rent or buy.
For example, renting an office will cost you more money in the long-term, but you’ll make smaller payments, meaning your business will have access to cash when needed. But if you were to make a lumpsum payment of $200K toward buying an office, you’ll leave your business massively short on working capital unless, of course, you’re sitting on a boatload of cash.
Incentivize Customers to Pay
If your sales model doesn’t require customers to pay upfront or during purchase, you’ll end up with accounts receivables. This isn’t a bad model, but it can present serious challenges to your cash flow.
Let’s say you sold services/goods worth $4,500 last month, but this money doesn’t come in until next week. But then you have to make a $4,000 payment today to a supplier, else they won’t make any further supplies. At hand, you have $1,000.
If such a situation is relatable, you know how sleepless your nights can get.
You can’t force your clients to pay up right now, especially if you have an agreement with them. However, you can entice them to pay up sooner.
You can, for instance, offer a 5 percent discount to early payers.
Most clients won’t pass up an opportunity to save a buck, especially if it’s a healthy buck.
When push comes to shove, you can seek accounts receivable financing. This service is offered by lenders who’ll finance you up to 100 percent of your accounts receivables, at a fee.
Do Due Diligence on Your Clients
When you run the “you can pay later” sales model, you’re really counting on your clients to honor their end of the agreement. If they don’t, you’ll not only run into cash flow problems but also waste more resources following up on your money.
This is why it’s prudent to do due diligence on a client before making a sale. Look into their credit rating. If it’s bad or poor, or they have no credit, there’s a good chance they’ll cause your trouble. You can ask them to make upfront payments until you’ve built a satisfactory relationship with them or turn them down.
When you have clients who make good on their promise to pay up on time, your business cash flow will grow, or at least remain steady.
Keep Expenses Low
To make a profit, one principle must stand: revenues must be greater than expenses.
To make even more profit, revenues must be much higher than expenses, or expenses must be far lower than revenues.
You can slice this cake whichever way you want, but the path of little resistance is to lower your expenses. Often, you’ve little control over revenues. You cannot force consumers to buy more of your product or service.
With expenses, though, there are actionable steps you can take to bring them down. If your rented commercial space is too big for your business, for example, relocating to a smaller, cheaper space will shave off a couple of hundred dollars from your monthly expenses.
Don’t pass up on any chance to lower an expense, especially if it doesn’t affect your operations. If you do, you’ll be doing your cash flow a big disservice.
Be Smart with Your Inventory
Your inventory can be a cash hog if not managed properly.
When you buy stock, the expectation is it’ll clear in good time. However, if sales slow down, you won’t recover the money you spent on the stock. In fact, prices could drop, meaning you’ll eventually make lower profits or even a loss.
Avoid such problems by implementing a smart inventory management system. Inventory software can provide detailed insights into your sales data. Use this information to make smart inventory management decisions.
Price Your Products/Services Competitively
While you can’t force customers to buy more, you can make them pay more. Just adjust the price upwards.
Although this comes at a risk of slowing down sales, it’s a smart move if the market demand for your product is strong. At a higher price per unit or bundle, your revenues will increase, as long your cost per unit remains constant.
How to Increase Cash Flow Simplified
Cash is the lifeblood of your business. Without it, any business will wither and die. Don’t let this happen.
With this guide on how to increase cash flow, you now know the strategies you can use to keep more cash coming in and less cash going out.
Keep reading our blog for more helpful small business tips and insights.
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