5 Ways to Improve Your Business Cash Flow

Cash flow is the lifeblood of any business. It’s the money coming in and going out of your business. Positive cash flow means you have enough money to pay your bills, invest in your business, and grow. Negative cash flow, on the other hand, can lead to serious financial problems and can be a source of overwhelming stress for many business owners.

It’s important to understand why your business has cash flow problems. The most common sources of cash flow problems are a lack of profitability and rapid growth. In the latter case, it’s important to recognise that growth requires capital in the form of increased working capital needs.

Here are 5 ways to improve your business’s cash flow:

1. Manage Your Working Capital – Working capital is the difference between your current assets and current liabilities. By managing your working capital effectively, you can improve your cash flow.

• Inventory Management: Ensure you’re not overstocking or understocking inventory.
• Accounts Receivable: Send invoices promptly and follow up on overdue payments.
• Accounts Payable: Negotiate longer payment terms with suppliers and pay bills on time.

2. Reduce Costs – Cutting costs can free up cash that can be used to improve your cash flow.

• Review Expenses: Identify areas where you can cut back, such as office supplies, utilities, or employee expenses. We generally recommend not cutting back on marketing unless you are certain that your marketing spend is not delivering an appropriate return.
• Negotiate Better Deals: Negotiate lower rates with suppliers and service providers.
• Review Labour Costs: Wages are usually one of the highest costs for any business. Ensure you are not overstaffed and that productivity is adequate.

3. Increase Prices – If you’re not charging enough for your products or services, your margins will suffer. This is one of the most commonly overlooked strategies we see in small businesses. However, it’s important to manage prices strategically.

• Regular Price Increases: Making small pricing increases are usually easier to implement.
• Communicate Effectively: Explain to your customers why you’re increasing your prices and how it will benefit them.
• Bundle Products or Services: This can be a good way to achieve overall price increases while offering value to your customers.

4. Review your Businesses’ Funding – If you are growing rapidly, you will probably need to carry more inventory and accounts receivable. Talk to your bank about the options for funding this growth, this might include:

• Business Overdrafts: A common product offered by all banks that allows you to draw the account into overdraft, up to a specified limit.
• Trade Finance: This is for funding inventory, the bank pays your inventory suppliers on time, but then gives you up to 180 days to pay for the stock.
• Invoice Finance: This option allows you to get paid upfront for your accounts receivable invoices.

The latter 2 options here can be ideal when you may not have sufficient assets to secure a business overdraft facility, as they are usually secured against the stock or receivable invoices respectively.

5. Improve Forecasting – Accurate cash flow forecasting can help you identify potential cash flow problems and take steps to address them.

• Do a 13 Week Forecast: This can be a simple excel spreadsheet that maps out your expected cash inflows and outflows each week, over a 13 week period. It is usually updated weekly.
• Identify Issues Early and Take Action: If you can identify that you will have a cashflow shortfall in say 6 weeks, talk to your bank now about what options are available for covering this shortfall. Banks like to see that businesses are keeping an eye on cashflow, and will be more likely to help if you give notice. Asking for funds at the last minute tells the bank that you are not watching cashflow closely enough and may be a risky customer to lend to.

After working with businesses for over 20 years, I can confidently say that aside from HR issues, cash flow problems can be the biggest source of stress for business owners and managers. By implementing these strategies you can improve your cash flow and financial health. If you’re not sure on where to start, get in touch with your accountant or the team here at Rockwall Partners.