Stressing over cash flow problems tends to be part of the job for many small business owners. Without money on hand, you can't make payroll, cover your bills, or pay your taxes.
Managing cash flow will help put your business on much stronger footing in the long term. Read on for eight hidden tips on how to improve cash flow, in order to give your business valuable financial breathing room.
8 ways to improve cash flow:
- Negotiate quick payment terms
- Give customers incentives and penalties
- Check your accounts payable terms
- Cut unnecessary spending
- Consider leasing instead of buying
- Study your cash flow patterns
- Maintain a cash flow forecast
- Consider invoice factoring
1. Negotiate quick payment terms
After you make a big sale, it can feel like the job is done. But you shouldn't celebrate just yet. You also need to make sure your clients deliver payment in a timely fashion. If your accounts receivables (cash inflows) start to build because clients take too long to pay, that can easily put you in a negative cash flow shortage, even if your business is highly profitable on paper.
To help speed up payment, start by negotiating terms with your clients to make the payment deadline as early as you can. You could also ask for a partial deposit upfront to immediately generate some cash. As soon as a client is late on a payment, reach out to remind them. We've put together a guide on how to encourage your customers to settle their accounts on time. If you’re having trouble keeping track, consider using invoice management and accounting software to automate the process for you and take electronic payments.
2. Give customers incentives and penalties
One tactic to encourage clients to make a payment early is by offering a discount, for example a two percent discount on the value of the invoice if payment is made within seven days. Other early payment incentives could include a discount on future orders, gift certificates or merchandise. Mention these incentives in the invoice so the client is immediately motivated to react to the offer.
You can also reduce the risk of unpaid invoices by adding late payment fees. Be sure to clearly highlight the late payment penalty in the initial customer contract and again when you first invoice, explaining what the fee is and when it applies.
3. Check your accounts payable terms
As you speed up processing accounts receivable, consider the opposite strategy for your accounts payables (cash outflows). Instead of sending out a check as soon as a bill comes in, read through the terms to see how long you can wait on payment. Just waiting until these deadlines can prevent a cash shortage.
Don’t be afraid to negotiate, either. Contact vendors and see whether they’d give you longer payment terms in exchange for your business. Finally, when you can afford to spend more, see whether you could qualify for a discount for paying early. This way you boost your profit margins when cash is plentiful while buying more time when it isn’t.
With an American Express® Business Card, you get up to 54 days until payment is due, so there's more time between paying suppliers and outstanding accounts – and your cash flow is maximised1. Your businesses can remain interest and credit free, while giving you more wiggle room on your balance sheet.
4. Cut unnecessary spending
Business expenses can sneak up on you: extra office space you don’t use, an unsold inventory build up, costly employee phone plans, to name a few. Each individual purchase might be a small amount but combined they can turn into a serious drain on your cash flow.
By dedicating time to business expense management and cutting out unnecessary spending, you can help plug cash leaks at their source. You can also think of your expenses with a year-round approach, and reduce certain costly expenses in times of the year they are not required to keep the business running.
5. Consider leasing instead of buying
Business owners can often avoid the large up-front costs of new equipment and other capital expenditure by renting instead. Leasing equipment for a fixed monthly fee will allow you to make smaller payments that don’t eat into your cash reserves.
Remember to consider the costs of repairs and maintenance of equipment the business owns when weighing up the benefits of leasing vs buying. Many commercial lease agreements include servicing, so if you’re spending a lot on technicians’ fees, leasing may be a better option.
6. Study your cash flow patterns
These negative and positive cash flow swings don’t have to catch you off-guard because chances are there’s a pattern. If you perform a cash flow analysis, where you study your business history to identify trends, you can spot cash flow swings ahead of time and start preparing earlier.
7. Maintain a cash flow forecast
A cash flow forecast is a document showing your business’s income and outgoings for a set period of time, broken down by weeks or month, or even quarter. It allows you to see at a glance when you will have a surplus or a deficit of cash in your account, helping you to plan when to pay expenses.
To create a cash flow forecast, you’ll need to calculate estimated cash incoming and outgoing each week. As with a sales forecast, use your historical data to identify patterns and guide your estimates, considering any trends or events that might increase or decrease these figures.
8. Consider invoice factoring
Invoice factoring allows businesses to free up ready cash by “selling” an outstanding invoice to a third party company. Typically, the third-party factor will buy an invoice for 70-90% of its total value, and then take control of the credit control process to chase the client for payment. Once the factor has received the payment from the client, they will pay the vendor the final outstanding invoice value, minus their fee.
For businesses that have high-value invoices – which could impact cash flow if they go unpaid – invoice financing can be a low risk way to release working capital.
1. The maximum payment period on purchases is 54 calendar days on the Business Gold and Platinum harge Cards and 42 calendar days on the Business Basic Charge Card, it is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date.