Your small business cash flow is one of the things that will dictate your success or failure.
Over the years, financial experts have shown that problems related to the cash flow of businesses are the main reason for the ruin or bankruptcy of businesses. Without cash, the winnings are worth nothing, no matter how big.
Many theoretically profitable businesses end up bankrupt because the amount of incoming cash is much less than the amount of money spent on purchases and expenses. When a company does not manage its cash flow well, it cannot make investments and therefore compete with others, and it may also be more expensive to apply for a loan.
Here we, at Fincue, show you some techniques to improve your business cash flow.
But, what is cash flow?
Before we dive into the subject, we need to know what exactly is cash. It is basically the movements of capital that enters and leaves a company. It can be followed weekly, monthly or quarterly.
There are two types of cash flow:
Positive cash flow: when the cash received from sales, collection of accounts, etc. It is greater than the cash that goes to pay bills, monthly expenses, salaries, etc.
Negative cash flow: when the amount of cash spent at the business is greater than the amount received. This is a problem for the company, but there are steps that can be taken to fix the situation and generate or receive more cash, cutting or eliminating some costs.
Having a positive cash flow is not something that is achieved by chance. You have to work hard for it.
You need to analyze and manage your cash flow to be more efficient in controlling the money that goes in and out of the business. Most small or medium-sized business accounting programs will help you compile a summary of your business cash flow. Also, many websites offer templates to make your task easier.
What is the difference between cash flow and earnings?
It is very important to distinguish “earnings” from cash flow, because they are not the same.
Profits , in accounting terms , are simply the result of subtracting expenses from income.
But the cash flow of a small business or any company is the resulting amount taking into account many other figures, such as bills to pay, capital expenditures, and debt service. To intelligently manage the cash flow of a small business, you have to focus on each of these elements.
Why is cash flow important?
Good Cash Flow = Growth
It is obvious that the cash flow of a small business has to be positive to generate profits.
If we apply logic, we will see that enough money is needed to pay the employees and suppliers who take care of or facilitate the process of making and selling our products. This sale of the product is what generates profits. But if the company does not have enough cash to make the product, then there will be nothing to sell, and therefore there will be no income. Hence the importance of structuring a company correctly to have a positive cash flow.
The growth process of a company is circular: you must have cash to carry out investments and certain expenses; This will lead to improvements, which will lead to higher profits, more cash flow and growth; and so on. We can see the cash flow of a small business as a tool to achieve goals.
Small business owners typically view their business growth as a solution to their cash flow problems, as growing a business increases cash. However, not knowing how to handle the expansion process correctly carries a risk, when cash is constantly disbursed and many times, in advance.
10 Ways to Improve Your Small Business Cash Flow
There are several things you can do to manage your small business cash flow.
1. Review and accelerate the accounts you collect
To improve your small business cash flow, the first option is to speed up the process of receiving and collecting your accounts. You can implement a series of strategies that will accelerate the traffic of money that enters your business, without disturbing your customers. You can, for example:
- Enable bank mailboxes so that clients you have in remote locations can send payments by mail.
- Ask your customers for prior authorization or confirmation of their checks so that banks can process them quickly.
- Centralize your accounts in a single bank.
- Provide your customers with various payment options: transfers, checks, cash, and credit cards.
- Offer discounts to customers who pay their bills quickly.
2. Adjust the sales requirements according to the credit of your customers
Businesses often have to extend credit to their customers, especially when they are just starting their business.
However, small business cash flow can be vulnerable and can even be wiped out if you make sales that are paid for on credit. You must find out if there is a risk of extending credit with each of your clients. You have to know if they will be able to pay their bills on time and if they really are in the process of growth.
Perhaps they are having cash flow problems and are using the fact that they are growing as an excuse to avoid payments.
We recommend that you make a detailed report on each client and ask them to fill out a credit application. You should also check the references you have for them. Another option to improve this type of income is that you accept credit cards. It will cost you a percentage, usually 2-5% of the sale, but it is a sure way to get paid.
3. Increase sales
It seems obvious and you’ve probably already thought about it.
If you need more cash, it is obvious to get it by attracting new customers, or by selling additional products or services to your existing customers. But this can be more complicated than it sounds. Getting new customers is essential to a growing business, but it can take time and money to make sales.
On the other hand, selling new products to existing customers can be cheaper and even easier. However, increasing sales to the same customer may only increase your accounts receivable, and not your cash flow, if you are making those sales on credit.
4. Offer discounts and promotions
One strategy for increasing cash flow for small businesses is to offer discounts and promotions to customers who pay on time or in advance. This practice can increase your profit margin. And it can also help you manage cash flow, as you’re incentivizing your customers to make payments before the billing cycle ends.
Your company can also take advantage of these early payments to pay its own suppliers or settle debts, but be careful that this does not leave you with a cash flow deficit.
5. Keep track of your cash flow.
Today many accounting software packages have a cash flow monitoring feature, so you can get daily, weekly or monthly reports of the amount you owe or are owed.
Proper monitoring (even if you do it by hand) will keep your cash flow present at all times.
Every business large or small should know what its cash balance is at the end of each month, and what it expects the following month to be like. This will allow you to plan and correct situations that should not be repeated. When you manage your cash flow efficiently, it is easier to make decisions about expanding your company and knowing how to properly maintain your invoices and your customers.
6. Make sure your customers pay on time
The process is that simple: your customers buy, you make the delivery, they must pay. Your customers are more likely to pay on time when you make it clear to them that they must. If you have a business that handles cash, it is even easier: your customers pay on the spot, or they do it with a credit card, and you receive the money with a discount in a couple of days.
If your company sends invoices to its clients, make sure they know when they must pay and of course, that they must. You are not an interest-free lender, so don’t let any of your clients take advantage of you.
7. Agree on sensible ways to get paid sooner
For example, you can offer a discount to those customers who pay you in 15 days instead of 30. And only to your best customers. Make others earn that privilege. You can offer a discount for paying on time, but at other times you may want to ask for an advance payment.
These two ideas may affect your earnings, but they will reduce the interest you pay to your lender. This may allow you to negotiate a discount with your own distributors for paying on time, so your profits will not suffer. If more customers pay you before you pay your distributors, you will always win.
8. Reduce your expenses
Even if your customers pay you on time, find a way (without disturbing your distributors) to delay your own payments. If you have more money coming in than going out, your cash flow will be good.
9. Increase your prices
A good way to manage cash flow is to have more cash coming in for an equivalent amount of products or services sold. This keeps the cost you pay low, but increases what you charge.
Are there special services, benefits, or product packages that you can sell for a higher price? Customers pay for perceived value, so as long as they perceive that they are getting more, they will pay more for it.
10. Use factoring for some of your invoices
One way to improve your cash flow is to “sell” some or all of your invoices to a factoring company . It works like credit cards. You make an invoice, your factoring company pays you a discounted amount in a few days, and they charge your client the full amount in 30 days. Your cash flow will be good even if you have to pay a little for it.
There are many ways for a small business to manage its cash flow . The important thing is to do it all the time, not just once in a while. We guarantee that the 10 ways proposed in this article work. You can modify them to your liking to suit the needs of your own business, and you will be able to verify that with all of them you can manage the cash flow of your small business in a simple and effective way. Know more.
Improve your cash flow with Fincue loan
A business loan can also be a great way to improve your business cash flow.
You can use the loan proceeds as working capital to finance the day-to-day operations of your business and maintain optimal performance. Our business loan, at Fincue, may be the best option: our fast financing process will ensure that your business does not suffer the consequences of a cash flow shortage. Speak with us today.