Cash flow is something every small business needs to thrive. It’s also something plenty of business owners struggle with.
When your cash flow is more of a trickle than a flood, that could keep you from pursuing your next growth project or make keeping up with day-to-day operating expenses difficult. The good news is that there are four key actions you can take to smooth out cash flow wrinkles.
1. Audit Your Business Expenses
If you’re feeling the pinch with regard to cash flow, your expenses could be part of the problem. Trimming the fat could free up cash that’s otherwise being wasted.
Pull the last three months’ of bank and credit card statements for your business. If you’re feeling more ambitious look at the past 12 months instead.
Go over each expense line by line, taking note of which ones are recurring and which ones are one-time or annual costs. Look for trends in what you’re spending. For instance, some expenses may have increased while others have decreased.
Also, pinpoint any expenses for services your business is using less often or not all. Get rid of anything unnecessary. The more ruthless you can be while cutting costs you don’t need, the better.
2. Expand Customer Payment Options
Giving your customers more ways to pay can be a simple fix for cash flow issues. As payments increasingly go digital, for instance, your customers will appreciate having more flexibility in how they pay.
If you currently only accept cash, checks, and credit cards, you might open that up to include ACH payments, digital wallet payments, or even cryptocurrency options. Making payments more convenient and faster could encourage customer loyalty and higher spending. It could also help attract new customers or clients, adding to your revenues.
Of course, weigh the cost of upgrading your payment systems into the balance. If you need to finance the purchase of a new point of sale system, for instance, you’ll need to factor the loan payments into your cash flow.
3. Review Accounts Payable and Accounts Receivable
Beyond reviewing your expenses, consider how frequently money flows in and out of your business as you pay expenses and collect outstanding invoices.
Concerning accounts payable, you could ask your vendors or clients to restructure your payment terms. If you’re currently paying on a net-30 basis, for instance, you could ask them to increase that to net-45 so you have more time to pay.
As you go over accounts receivable, look at the current payment terms you offer. Specifically, look for the consistent late-payers in the group. If you don’t have a late payment penalty in place, you may consider enforcing one to encourage those clients or customers to pay on time.
It’s a simple enough tactic, but it could be effective in increasing the speed with which invoices get paid. If they don’t pay on time, you get the benefit of a little extra cash flow from the fee once they do pay.
Also, try to align the timing for accounts payable and accounts receivable. Having money coming in and going out as close to one another as possible could help you avoid cash flow gaps.
4. Consider Adding to Your Products or Services
Raising prices can help improve your cash flow, but price hikes can be tricky to execute. It’s challenging to find a price point that can add to your bottom line without alienating your existing customer base or first-time customers.
Increasing the range of products and services you offer could result in a better ROI, not to mention more cash flow. How you go about expanding your products and services depends largely on the type of business you have and what you can invest.
For instance, say you own a commercial painting business. You primarily focus on interior and exterior paintwork for offices and retail businesses. One of your customers asks if you create custom signs. That’s a niche your competitors might not be targeting.
However, you’ll need capital to purchase the materials necessary to start making signs and to market that new service. If you don’t have the cash flow to cover those costs, it may be necessary to get a loan or line of credit. The advantage of a line of credit, however, is that it’s flexible funding you can use as needed and you only pay interest on the portion of your credit line you use.
The Bottom Line
Improving your cash flow can improve your business’s overall financial health. Managing the flow of money through your business shouldn’t be a source of stress. Putting one or all of these strategies to work can help you generate positive results for cash flow so you can keep your business firmly in the black.
Written by Rebecca Lake
Rebecca Lake is a financial journalist covering small business, investing, and personal finance. Her work has appeared online at U.S. News and World Report, Investopedia, and The Balance. She also works with top banking and insurance brands, including Citibank, Ally, Discover Bank, and AIG.