Improving Your Business’ Cash Flow Situation

It is estimated that around 57% of small business owners have experienced problems with cash flow. Even with larger scale companies, 24% cite late payments as a threat to their existence. So how do you keep money coming into your business?

You can never predict cash flow exactly, but there are methods to improve and ensure it remains positive. Read on as we give ways to increase your business’s cash flow.

What Is Business Cash Flow?

Business cash flow is the amount of money coming into a business. Known as the receivable, it has to be balanced against the amount going out. These are known as the amounts payable. 

In an ideal situation, you will have a consistent positive cash situation. This is where more money is coming in than being paid out. At its most basic level, bookkeeping can keep track of this though you may need a dedicated accountant for managing taxes and wider business expenses. 

Managing cash flow is important as times will always arrive when money coming in gets tight. Larger businesses may have huge reserves to keep them going, but others may not be so fortunate. 

Creating a Cashflow Forecast

Before starting any attempts to improve cash flow for the business, create a forecast. This lets you see where your revenue is coming from presently and in the near future. You can see where any bottlenecks occur or problems arise from getting the money you need. 

Don’t just predict the money coming in but look at expenditures that may have gone out and account for variables. For example, increases in raw material costs and increased salaries may impact the profit you make. Once you have this, you can get a healthy overview of the financial position of your business.

1. Improve Your Process for Receivables

Receivables are the amounts owed to you by customers. If your clients take longer to pay than expected, it can cause numerous cash flow problems. This is made worse if you have spent money in advance on supplies and materials. 

Start by being proactive and looking out for customers that have a bad credit history. While credit is part of all business, check before starting a trade to see if you can trust a company to pay the money back on time. The sale may not be worth the long term problems it causes.

Should you decide to take the risk, then make sure you have a formal document in place. Apply increases in interest and outline the terms of the agreement clearly. 

Consider using electronic invoicing systems. Not only do they have a professional look, but they can also be automated to send reminders for unpaid bills. You may even offer incentives or discounts to anyone who pays early. 

Finally, make it easier for people to pay bills. By adding more payment options, you are more likely to get paid on time from debtors. 

2. Manage Your Inventory

The physical assets of your business are mostly held in the inventory. If an inventory is well managed, coming in and going out fast in equal numbers, it is great for cash flow. Yet inventory is far more complicated and can be a place where cash flow stagnates.

Most businesses have a small amount of inventory that sells regularly and the rest are less so. Known as the Pareto Principle, it is a rule that states businesses earn around 80% of their profit from 20% of their inventory. Check your stock to see which items are not selling.

These items are stagnant, taking up valuable storeroom space. Think of ways to sell them fast, even offering discounts if you need to do so. 

Try to forecast upcoming sales and account for them in inventory management. For example, you don’t want a warehouse of winter clothing if summer is approaching fast. This can be done by delving deep into historical data to see how your business has operated quarter by quarter. 

3. Review Your Finance

Knowing when and where you can get finance is essential. Most businesses have a cash flow crisis at some point. Having the means in place to overcome it is an important insurance policy.

You may also just need finance to make your business bigger or buy new equipment. Perhaps you have a larger than expected order and need extra materials to fulfil it. Finance can assist, giving you the cash flow injection you need.

Aside from banks and other financial institution loans, consider invoice finance or asset-based lending. This lets you use unpaid invoices as security. A partial amount of them is paid to the lender as a borrowing fee. 

Factoring is a similar option, but you sell your unpaid invoices off for around 70% to 90% of their value. There has been a steady decline in this method over the past few years, but it is still a great way to bring in cash quickly. While you get less money you get it quicker increasing your business cash flow.

Finally, you may be able to get access to a business line of credit. This is where you are given a credit limit, much like an overdraft and you can take out a lump sum or smaller amounts. Shop around as interest rates vary vastly, from anywhere between 5% to over 20%. 

4. Sell More Products

This sounds like an obvious way to improve cash flow for a business. Yet with the many other tasks involved in running a company, it can get forgotten about or waylaid easily. 

Take a look at your current products in the retail landscape. Are they still relevant or do they need updating?

After this, check your markets are still there and if they have waned or gone, look at new and emerging markets. Find areas you may not have considered looking at before. For example, our organisation can offer assistance with public sector contracting

Consider raising your pricing. Many people get put off this because they are afraid of losing business. Yet inflation is a natural process and your prices need to rise to accommodate. 

Then take a look at your current marketing efforts. Are they hitting the right target audience or bringing the return on investment they should? Could you use other, newer methods to bring in more leads and conversions?

Continual Improvement of Your Business’s Cash Flow

Now you know how to improve a business’s cash flow, don’t leave it there. Periodically review it every year. You may see new opportunities or chances to boost it.

Have you ever considered public sector contracting as an option to improve your cash flow? Supply2Defence can help organise a range of contracts from aerospace to cyber security. Click here to see our pricing and what we can do for your profit. 

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Improving Your Business’ Cash Flow Situation