How to Improve Your Cash Flow

Cash flow is critical for businesses, so cash flow management is key. Here's how to improve your business's cash flow situation.

MaxCap flexible funding options improve your cash flow

In business, cash is like oxygen. A business without money on hand is usually doomed to suffocate. That means managing your cash flow is critical to the survival of your business. Unfortunately, many businesses experience common cash flow issues that make it harder for them to operate. This guide will help you understand cash flow management more clearly and identify key cash flow issues you should do your best to avoid.

What is cash flow?

Cash flow refers to the total amount of money flowing in and out of a business. It encompasses all the revenues and all the expenses of a business at a given moment in time. Cash flow management means planning your inflows and outflows accordingly to ensure your business always has cash on hand.

Why is Cash Flow so Important for Small Businesses?

Healthy cash flow is important for businesses of any size. But cash flow is especially important for small businesses. Your company’s ability to grow hinges on your ability to attract new prospects and handle large orders. However, these two goals are difficult to achieve if you lack the cash flow to invest in marketing initiatives or prepay vendors for products to fill those large orders. Here are a few reasons why it is important for your small business to have a healthy cash flow:

  • You will have the capital to be able to invest in new products or ventures
  • You can pay your vendors on time and position yourself for discounted pricing
  • You will be able to handle unexpected emergencies that can prove to be costly
  • You can comfortably handle basic operating expenses if payments from key customers are delayed  


Top 15 tips on how to improve your cash flow?

  1. Good understanding of your accounts

It may sound dull but the first step to good cash flow management is to understand the flow of money through your business. For that, you need accurate and up-to-date information. Whatever your size of business, you should be routinely receiving a regular stream of data about your numbers – debtor books, budgets and cash flow forecasts should be at your fingertips.

If you are not currently using one, you should consider investing in an accounting software package which will provide this information on a real-time basis.

  1. Invoice accurately

Research from PwC finds that around 85 per cent of the reasons given for non-payment by business customers relate to invoice queries or poor administration. It’s essential to get the basics right, such as invoicing the right amount and sending it to the right place.

  1. Offer Discounts for Quick Payment

Develop a discount program to encourage quick payments, collecting cash owed to you as fast as possible. Normal payment terms allow a 30-day period for remittance after the receipt of an invoice, with a 2% discount if paid within the first 10 days. You can offer more, less, or no discount for payment, depending upon your needs and your customers’ previous pay habits.

Remember, however, that your ability to institute a collections policy will depend upon your relative strength versus that of your customer. A major account might take an offered discount and still pay late.

  1. Penalise Late Payers With Interest Penalties

A penalty for late payers is the “stick” in the “carrot and stick” approach to collections, the “carrot” being the discount for early payment. While collecting the interest may not be possible in all instances, the presence of the policy will emphasise the importance of on-time payments to your customers.

  1. Match receivables to payables.

An often forgotten aspect of how to improve cash flow for small business is to look at the payment terms for your suppliers and compare them to the payment terms for your customers.

If you’re required to pay your suppliers within 30 days but you allow customers to pay within 45 or 60 days, you’re creating a gap in cash flow. When considering how to improve cash flow in small business, that’s an important area to focus on.

Consider matching the supplier terms of payment to the customer terms of payment, if possible. What penalties do your suppliers charge for late payment? You might be able to do the same for your customers’ late payments. 

  1. Consider factoring your unpaid invoices.

If your business is growing rapidly and you’re concerned about meeting your overheads, you may want to explore factoring your unpaid invoices as a potential, short-term solution to cash-flow problems. (The dictionary defines factoring as “the business of purchasing and collecting accounts receivable or of advancing cash on the basis of accounts receivable.”)

Factoring works this way: Once you issue an invoice, a factoring company pays you a percentage of the account receivable (generally 70 to 90 percent), so you don’t have to wait to get paid by the customer. The factoring company takes on the responsibility of collecting the money from the customer.

Invoice factoring can help improve your cash flow and free up the working capital needed to run your business. As with any such financing transactions, be sure to seek professional advice to determine if this is a suitable option for your business.

  1. Reevaluate Operating Expenses

Managing cash flow isn’t just about getting more cash to come into your business. It’s also important to reduce the cash going out of your business as much as possible.

  1. Liquidate Old Inventory

Inventory is one of the largest business expenses you might encounter. You need inventory to make a profit, but you want to make sure the inventory you’re buying is actually selling. Carefully consider which products sell well and which you have a hard time turning over. Take a look at your sales patterns to see when your busy and non-busy sales times are and order inventory accordingly.

If you have any old inventory that you’re having a hard time getting rid of, consider liquidating the items. Any money coming in is better than no money.

  1. Open A Business Savings Account

If you don’t have one already, open a business savings account where you can earn money on interest. This is a simple way to generate a bit of extra cash, and it’s a smart way to ensure you always have a cash flow cushion for your business.

  1. Consider “continuity” sales

Another way to improve your cash flow is by offering deals on your products or services to customers who buy for a fixed period of time. A subscription-based product such as a newsletter or magazine is a good example of how continuity sales work: you pay the publisher upfront for a one-year or two-year subscription; in return, you get a better deal on the cost of the newsletter.Continuity sales can be made to work for almost anything. Your customers save money on a package of goods or services, and you get the cash upfront.

  1. Invest in your business

Any steps you can take to build your business, such as training staff or boosting your marketing, can help improve cash flow.

  1. Encourage use of payment cards. 

Depending on the nature of your business, you may want to consider accepting credit card and debit card payments. This allows you to receive next-day value for your sales and services, without the need to handle cheques and make deposits.

Whether you serve customers over the counter or online, a merchant services solution makes it easy to process payment cards. Don’t forget to compare costs when investigating a merchant services solution.

  1. Use software to track your inflows and outflows

Accounting and invoicing software is the easiest and simplest way for you to stay on track with your business cash flow. Effectively, it can automise a lot of your business processes (for example by matching payments to invoices), and also allow you to have a holistic overview of your business cash flows at any point in time.

Especially for small businesses, using an invoicing software can help you organise and register all incoming and outgoing payments. This is the first step towards improving your business cash flow.

  1. Experiment with your prices

Another way for you to increase your cash flow is by increasing your prices. Changing – and more specifically increasing – prices is something many business owners are scared to do.

There is no guarantee that increases prices won’t mean losing some sales, but it could also mean an increase in cash inflow. So, there is no harm in experimenting with your prices, and finding out how price elastic your customers are.

  1. Take Out A Small Business Loan….from MaxCap!

Another option to increase cash flow is to take out a short-term loan. With a short-term loan, a lender gives you a lump sum of money that is paid back in regular instalments over a short period of time. 

Apply Now for a short-term business loan from MaxCap, and use the finance for any business use.