Nearly every business leader experiences a cash flow problem at one point or another. And it doesn’t matter if it’s an isolated incident or a systemic problem. It’s stressful! The good news, however, is that you can learn how to increase cash flow in your business and how to avoid this challenge in the first place. All you need is a little foresight, creativity, and a dash of financial wizardry.
One thing to keep in mind though is that you will need to refine your approach to suit the nature of your business and the state of the economy. I work with clients to diagnose and resolve cash flow issues every day as part of my fractional CFO services, but it’s not a one-size-fits-all situation. Use the tips below as a guide but be critical when deciding which options are best for you.
Now, before we go any further, let’s clarify what cash flow is and what it’s not.
What is Cash Flow?
The term “cash flow” refers to the amount of cash that your business generates in a particular period of time, i.e., the amount of money in your company’s bank account. Sources of cash include funds that you collect from customers or amounts that you raise from outside lenders or investors. Uses of cash include paying your employees, suppliers, and lenders. This cash may reside in your checking or savings accounts, or it can even take the form of short-term investments – as long as you can access the money at a moment’s notice.
Cash flow isn’t the same as profitability. Profitability refers to the amount of financial gain your company receives as a result of its business activities, but this isn’t necessarily cash in the bank. You can be profitable because you sold more in a given month than you spent generating that income, but if you need to wait 30, 60, or even 90 days for your customers to pay, you can still have a cash flow problem. So, what can you do about it?
How to Increase Cash Flow: 10 Actionable Tips
The following tips will help you generate ideas for improving your cash flow. Feel free to jump around using the links. However, we would strongly encourage you to start with Tip 1 as it is a great way to identify current issues and head off problems that will arise over time.
- Build a Cash Flow Forecast
- Renegotiate Terms with Vendors and Suppliers
- Build a Strong Receivables Management Process
- Take Advantage of Customer Financing Models
- Don’t Be Afraid to Take on Some Debt
- Eliminate Non-Essential Expenses
- Sell Ancillary Services
- Increase Prices / Fees
- Branch Out into New Sales & Marketing Channels
- Establish Weekly Financial Metrics Reporting
Tip 1: Build a Cash Flow Forecast
The very first thing we recommend you do, and what we do when working with clients, is to build a cash flow forecast. A cash flow forecast starts with your cash position today then projects forward based on your anticipated revenues and expenses. It provides you with visibility into where things will stand each month, or even each week if that’s what your business requires. This allows you to identify times of positive or negative cash flow and test scenarios so you can prepare.
Here are the basic steps:
- Perform an in-depth analysis of your current financial position.
- Consider your plans for the next 12 months in terms of profit and loss.
- Forecast out your balance sheet, capturing everything that will involve an inflow or outflow of cash.
- Combine your profit and loss plans with your forecasted balance sheet to get a complete picture of your expected cash flow month-to-month or week-to-week.
Once you have your forecast, you can use it for managing your cash flow. Make it a practice to compare how your business performs each month to what you forecasted. Then, if you get off track, make any necessary adjustments.
Tip 2: Renegotiate Terms with Vendors and Suppliers
When you’re trying to figure out how to increase cash flow, one of the more impactful things you can do is to renegotiate contracts with vendors and suppliers. Although it may not be possible with everyone, a quick review of your records may unearth some opportunities. Here are a few examples:
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- Rental Agreements
Although you may have a lease, that doesn’t mean you can’t request a change. If you have a 5-year lease, for instance, that’s running you $10,000 per month and you have 3-years left on that lease, it’s worth looking at some options. You could offer to extend the length of the lease for 1 year in exchange for a 10% reduction in rent. If your landlord agrees, you will generate positive cash flow.
- Supplier Terms
If you have a supplier that you use all the time (and you’re in good standing) you may have another opportunity. You could ask for a break on the overall cost or even just shipping charges in exchange for a commitment to a larger order that they will send over time.
- Utility Providers
Many households have figured this one out, but it works for businesses too. You can contact your cell phone provider, for example, and request a reduction to their best available rates. They’re likely to agree as they want to keep your business and the reduced price can have a huge impact at scale.
The trick with any of these scenarios is to come to the table prepared to make an offer. Review your records and do the research so you can present comparable data. Then make your case in the spirit of “let’s create a win-win.” In other words, explain that you’re a good customer and you want to continue working with them, but you need something in return.
Tip 3: Build a Strong Receivables Management Process
It’s surprising how many companies don’t have a good process for collecting payments. I’ve seen services businesses, for instance, that do fantastic work for their clients, but bill in arrears then completely fail to follow up on late payments. Clearly, this will inhibit your cash flow.
So, when solving weekly or monthly cash flow concerns, we recommend developing a rock-solid, repeatable process for receivables management. This typically involves:
- Investing in Invoicing and Accounting Software
If you don’t have a solution (like QuickBooks) for managing your finances or if you’re not using important functionality that can keep your receivables current, now is the time to invest. In addition to tracking business cash flow, these solutions can send you an alert when a client’s bill is past due so you can remember to follow up.
- Imposing Penalties for Late Payments
Your clients may defer payment until the very last minute (or even pay late) if there’s no incentive to pay on time. This can have an adverse effect on your bottom line. One way to discourage this behavior is to make it clear when payment is due and what the penalty is for late payments. A simple 1.5% per month penalty fee (18% annually) can be a helpful “hammer.”
Although such structure may feel unnatural at first, after a few months you’ll get into a groove and your clients will undoubtedly understand that this is a necessary part of doing business.
Tip 4: Take Advantage of Customer Financing Models
On the flip side of managing receivables are payment models and practices that make it easier for you to collect payment sooner. This form of financing serves to increase your cash flow and should not be confused with extended payment terms that protect your customers’ cash flow. There are a few basic ways to go about this:
- Accept Credit Cards
Many companies are becoming more interested in paying by credit card. Thus, if you offer this as a payment option, you may be able to accelerate receipt of funds since you can process an invoice and be paid within 2-3 days, as opposed to a month or more when being paid via check. The 3% transaction cost imposed by the credit card company can often be passed along to your customers. The option greatly improves your receivables and puts more cash in the company’s coffers.
- Pre-Payment Discounts
These models offer a benefit to both parties. The customer gets a deal in the form of an early payment discount and you get the cash you need to run your business while reducing the need to chase down late payments.
You’ve undoubtedly seen this in practice with companies like Zoom. Customers can pay for Zoom’s virtual meeting solutions month-to-month or get a reduced rate if they pay for an entire year of service up-front.
This model works well for recurring revenue services, but it is also effective with other types of products or services. You may have heard of “2 net 10” or “2/10 net 30” payment terms. With these terms, as an example, you sell your customer $10,000 of widgets. If they pay you within 10 days, you give them a 2% discount. So, you would receive $9,800 as much as 20-25 days sooner than the standard “net 30” terms.
- Invoice Factoring
A lesser knowing customer financing option is invoice factoring. This is when you bill customers as normal, then sell that invoice to a third party so you can get the working capital you need today. This also means you no longer need to chase down payment – the third party assumes that risk for a small fee (typically 1%-2%).
Tip 5: Don’t Be Afraid to Take on Some Debt
Although it’s certainly preferable (and less stressful) to run your business debt-free, we’d encourage you to keep an open mind. Especially when you’re trying to decide how to increase cash flow. In short, debt is fine as long if you can afford it, meaning you should be able to service both the debt and the interest comfortably. Avoid debt, however, if you will only be able to pay the interest.
This is one of those times when your cash flow forecast (see Tip 1) will come in handy. Use it to model the impact of taking out a loan on your current and future cash flows. This will help you to see how long you’ll be in debt and how the influx of funds will affect your ability to drive revenue. This insight will help you make such decisions with confidence.
Whether your debt comes in the form of credit cards, a line of credit from a financial institution, or even long-term loans from friends and family, the important thing is to be clear on the terms. Secured loans (those based on the assets of the business or a personal guarantee) are much less expensive (3%-4% interest) than unsecured loans. Unsecured loans can range anywhere from 6% to 8% for bank loans to 25%-35% for non-traditional lenders. And beware of lenders that build oppressive performance terms and conditions into their agreements that can put your business at risk.
If you are at all unclear about the best arrangement for you, consider consulting a professional.
Tip 6: Eliminate Non-Essential Expenses
When things are going well it’s easy to overlook excess expenses. But when you begin to experience cash flow problems, you no longer have this luxury. When seeking ways to improve cash flow, you must go through your expenses with a fine-tooth comb in search of fluff.
This doesn’t have to be as painful as it sounds, there are often some easy opportunities that appear naturally as you build your cash flow forecast. Here are some common areas of waste to look for:
- Planned Investments That Can Wait
This could include technology upgrades, research and development, legal fees for trademarks, or even hiring plans. But should not involve putting off any safety upgrades that could leave your business at risk.
- Professional Development and/or Training Expenses
While clearly important, if you’re cash strapped you may be able to push such expenses into the future to get some relief.
- Unnecessary Travel and Meal Expenses
Although some travel may be necessary, this is a huge area of waste for many organizations. Be extremely critical of your choices here.
- Employee Perks
Your employees may grumble if you cut down on perks like gym memberships, company-sponsored happy hours, and expensive snacks. But they will quickly come around if you explain that you need to improve cash flow but see downsizing or cutting salaries as a last resort.
Tip 7: Sell Ancillary Services
One of the most exciting ways to increase cash flow is to bolster your revenues by expanding your offering. For example, imagine that you manufacture and sell widgets that are used in the production of larger products. You might offer consulting services to your customers whereby you help them incorporate your widgets more effectively into their overall product line. This would be a valuable service to your customers as it would help them produce the end product in a more cost-efficient manner and would allow you to charge more.
Of course, it’s important to avoid overextending yourself. Focus on products or services that complement your current offering to avoid straying too far from your core competency. Also, since cash flow is a concern, steer clear of anything that would add costs you can’t easily absorb. Other ideas for the widget manufacturer would be to extend the product line by offering complementary products or expand into another target market using the same product line.
Tip 8: Increase Prices / Fees
One thing we look at when our clients ask us how to increase cash flow is pricing. If you’ve been underpricing your products or services or haven’t raised your rates in several years, there may be an opportunity to impose an increase. Alternatively, you could look for ways to add value to your current offering so you can justify charging more.
This is a delicate topic, especially during an economic downturn. If you’re in a competitive space, you can’t afford to price yourself out of the market. And you certainly don’t want to scare off loyal customers with a significant bump in cost. But if you can find a way to explain the increase it’s worth exploring.
The important thing is to be transparent about the change. Some restaurants, for example, are charging a temporary “Covid fee” to offset the cost of complying with new regulations. Most customers understand and deem this reasonable. Or, if you haven’t raised your rates in several years, mention this in your communication to clients. Explain that you value their business, but in order to keep up with inflation you must occasionally raise your rates.
Tip 9: Branch Out into New Sales and Marketing Channels
Spending more on marketing and sales probably isn’t the first thing that comes to mind when you’re looking for ways to come up with extra cash but bear with me.
Sometimes there are hidden benefits to a change in the economy. You may have more time, underutilized resources, or simply a different perspective. Whatever the case, it occasionally makes sense to explore things that are counterintuitive. Instead of conserving cash, for instance, you might consider shifting funds from one initiative to another to strengthen your position in the market. Here are a few ideas:
- Invest in Search Engine Optimization (SEO)
If you’ve been spending money on advertising, but it’s just not paying off, consider reallocating some of those funds toward SEO content. SEO is a long-term play in that it takes time to gain traction and to see an ROI. Once it takes hold, however, this investment can provide a return long after you do the work.
- Build Partnerships
We all know that strong, symbiotic relationships are crucial for getting referrals. But, similar to SEO, it takes time to build these connections and to get them to pay off. So, if you find yourself with extra time on your hands, this is a great opportunity to invest in your network.
- Upgrade Your Technology
As you’re looking for ways to increase your website traffic, leads, and sales, don’t forget to scrutinize your processes. Do you have the resources in place to handle an increase in demand? If not, now is the time to upgrade your CRM, gain clarity on what constitutes a “qualified lead,” and build automated email campaigns.
Tip 10: Establish Weekly Financial Metrics Reporting
Of course, if you’re going to put forth all this effort, you must be diligent about tracking results. But how do you determine which metrics and reports are right for you? By asking yourself some important questions:
- What, exactly, you wish to achieve in the coming months?
- Which metrics would show success?
- Which metrics can you watch to get insight into your progress?
- Do you have the right systems and processes in place to accurately measure results?
- Do you have the capability to make sense of this data and to use it to get the insights you need to make sound financial decisions?
I realize, this is my last tip, but it’s important. Developing a strong, reliable system for measuring the impact of your initiatives takes some effort, but it’s crucial toward ensuring success.
The Benefits of Improved Cash Flow
It’s critical to have an up-to-date and accurate view of your cash flow situation because you simply cannot survive without cash. After all, a profitable business is meaningless if you can’t access the funds you need to pay your suppliers and employees who keep everything going. While this is true for companies of all sizes, it’s especially relevant for small and medium-sized businesses because cash flow can have a tremendous effect on your ability to grow and thrive.
The benefits of improved cash flow are clear. You get the peace of mind that comes with knowing you can make payroll and access the funds you need to fuel your growth. But, just as importantly, you will be much more capable of making confident, impactful business decisions when you aren’t doing so from a place of distress.
There are plenty of ways to free up cash if you know where to look. At The CEO’s Right Hand, we work with our clients to diagnose and resolve financial puzzles like “how to increase cash flow.” Schedule a free consultation to learn what we can do for you.