When it comes to running a business, stressing over cash flow tends to be part of the job. Without money on hand, it’s not possible to make payroll, cover your bills or pay your taxes. But the good news is you don’t have to move mountains to improve your business cash flow. By fixing a few common leaks, you can buy yourself some valuable financial breathing room.
Leak 1: Slow Collection on Invoices
After you make a big sale, it can feel like the job is done. But you can’t celebrate just yet. You also need to make sure your clients deliver payment in a timely fashion. If your accounts receivables start to build because clients take too long to pay, that can easily put you in a cash-flow shortage, even if on paper your business is highly profitable.
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 up front to immediately generate some cash. As soon as a client is late on payment, reach out to remind them. If you’re having trouble keeping track, consider using invoice management software to automate the process for you.
Leak 2: Covering Accounts Payable Too Quickly
As you speed up processing accounts receivable, consider the opposite strategy for your accounts payable. 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 extra payment time 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.
Leak 3: Not Using a Cash Back Credit Card
When you pay your bills by check or bank transfer, you’re missing out on another opportunity to improve cash flow. Some business credit cards offer cash back on all your purchases. Many have a typical reward rate between 1% to 2%, and can sometimes even be higher depending on the program.
As an example, if you run $500,000 per year through a credit card with a 1.5% cash back rate, you’ll get $7,500 back just for making your usual purchases. So long as you pay off your statement by the deadline each month to avoid owing interest, then those rewards are basically free money and automatically add positive cash flow.
Leak 4: Too Many Unnecessary Expenses
Business expenses can sneak up on you: extra office space you don’t use, lots of out-of-town conferences, an unsold inventory buildup and 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.
Leak 5: Overpaying for Debt
High-interest debt is another drain on your cash flow because every dollar you pay in interest is money that could have gone to paying off your loan. There are some strategies you can use to reduce your interest rate.
One option is to consolidate your debts, especially short-term high-interest debt, into one longer-term loan charging a lower rate. You could also take out a credit card with a 0% introductory interest rate. With these cards, you can delay owing interest for a year or longer.
The money you save on interest will help give you extra positive cash flow for paying off your debt and for your other business operations.
Leak 6: Not Studying Cash-Flow Patterns
Cash flow tends to fluctuate throughout the year. Some months you have more money than you need but during others, it gets tight. If you don’t expect an upcoming cash jam, it can leave you scrambling.
These 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.
By dedicating time to business expense management and cutting out unnecessary spending, you can help plug cash leaks at their source.
Leak 7: Failing to Have a Backup Plan
While a cash-flow analysis can be a big help, life is still unpredictable. It’s possible that despite your best efforts, you still run into a cash-flow shortage. Knowing that this can happen, consider setting up a backup plan ahead of time.
One potential backup plan can be to apply for a line of credit or business credit cards. It may give you the option to borrow at your convenience when you are short on cash. It may be better to apply when you’re in strong financial shape because you may qualify for a better interest rate, plus you won’t be stressing over the application waiting period.
Improving cash flow can be a challenge, but it’s a challenge you can overcome. By fixing a few leaks here and there, you can help put your business on a much stronger footing.
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