Without sufficient cash flow, businesses are unable to pay their bills, purchase materials, and cover operating costs. Fortunately, there are several ways to effectively increase cash flow.
Improve your accounts receivable process
The lifeblood of any business’s cash flow is, of course, accounts receivable (AR). That’s why it’s so important to implement processes that will ensure AR is running like a well-oiled machine. A simple, yet effective practice is to send invoices out immediately after delivering your product or service. Make sure your invoice is easy to read and accurate, and clearly outlines your payment terms, such as due date, accepted payment methods, and penalties or discounts. Any confusion with invoicing can delay payment and put you in a cash flow shortage.
Offer incentives, issue penalties
We’re motivated by rewards. Consider offering an incentive to customers who pay their invoices early. This could be, for example, a small discount on the outstanding invoice, a percentage off a future order or free shipping.
You can also help reduce the risk of late or unpaid invoices with penalties such as late payment fees. Make sure to clearly highlight and explain the payment penalty, charges and fees not only on the invoice, but also before they make their purchase.
Manage your accounts payable system
As you develop ways to speed up your accounts receivables, take an opposite approach in handling your accounts payables. When paying an invoice, review the terms to see how long payments need to be made. And, if you have a positive and long-standing relationship with your vendor, discuss extending your payment terms with them. The idea here is the longer you have to pay, the more time money has to come in.
On the other hand, if your vendor is offering an early-payment discount and you have the cash on hand, take advantage of it. In this instance, the focus is on increasing profit margins rather than buying more time.
Leasing vs. buying
If you’re trying to manage your cashflow, leasing business equipment can offer several advantages over buying it outright. Leasing doesn’t require large, up-front costs—which would help conserve working capital. Leasing also gives you the ability to budget and forecast, thanks to a fixed monthly fee that won’t eat into your cash reserves.
In addition, leasing equipment can include a maintenance and/or service agreement. The cost of maintaining equipment can be costly. If the equipment is leased, however, the company you leased it from is responsible for maintenance and repairs. This can greatly reduce downtime and ensure equipment remains in good working condition.
Consider financing options
If you choose to purchase your business equipment—or are spending on other medium- to high-cost items—take advantage of low- or no-interest rate financing options. Whether you’re purchasing brand-new computer equipment, office furniture, or company vehicles, this type of financing can provide several benefits. It can help minimize cash outflows and preserve cash for day-to-day operations—such as payroll, inventory, marketing and maintenance—without depleting cash reserves. In addition, if you pay off the loan before the high interest rate goes into effect, you’ll save even more.
Make your savings work for you
If you have cash on hand that’s being held for emergencies or unexpected expenses, you can increase its value by depositing it into a high-interest savings account. These types of accounts allow businesses to preserve their capital while earning high interest rates. They can also serve as “temporary storage” for cash that isn’t being used immediately, help businesses accumulate funds for future growth or investment opportunities, assist in tax planning and reserves management, and provide relatively quick and easy access to funds when needed.
Become an expert in forecasting cash flow
Knowing the literal ins-and-outs of money that runs your business is crucial for effective financial planning and management. To help set you up for success, you can perform a historical data analysis, which identifies cash-flow patterns and trends, and become the basis for projecting future cash flow based on past performance.
From there, create a cash-flow forecast, which is used to estimate and predict inflows and outflows over a specific period. Examples of inflows include customer payments, investment income, or any other incoming cash receipts. Cash outflows include estimates of expected cash outflows, loan repayments and inventory purchases. A cash flow forecast gives you the ability to see when you will have a surplus or deficit of cash, thereby helping you plan when to pay expenses.