Like a river, cash flows through a business. Money comes in and it goes back out. In accounting terms, this is referred to as ‘cash flow.’ In an ideal world, a business would always have a positive cash flow-meaning more money is coming in than going out. Unfortunately, that is not always the case.
Why is a Positive Cash Flow Important?
Businesses strive for a positive cash flow for a variety of reasons. Some of those reasons include: being able to pay debts, suppliers, and employees, having more buying power and being able to grow the business.
All business struggle with cash flow at times. It is the nature of the beast that sometimes there is just more money leaving the business than is coming in. Sometimes it is simply a matter of timing and it will right itself in a little bit, but other times, you may need to take action in order to increase your company’s cash flow.
Creative Ways to Increase Cash Flow
1. Invest money in high interest earning bank accounts
If you need cash quickly, this isn’t the best step. But, if you are looking to increase your cash flow over time, it’s a good idea to look at your bank account options and see if you can get some more bang for your buck.
2. Require larger deposits
Do you require a deposit on your product or service? If you are having cash flow issues, it might be time to ask for more money upfront.
3. Offer a quick or upfront payment discount
If you sell items with large price tags, or if you have a subscription based business, such as a Saas company, you may only be receiving small increments of payment at a time. If you need more cash now, entice customers to pay the whole sum upfront by offering a small discount.
Customers who are having cash flow problems themselves may not take you up on the offer, but those who are able will bite at the chance to save some money in the long run.
4. Introduce a maintenance plan to your business plan
This option may not work for all business models, but it never hurts to examine all of the possibilities. If typically your company is based on selling individual products or a one-time service, look for an opportunity to offer something that requires customers to pay on a regular basis.
For example, a heating and cooling company, after selling a furnace, may offer a plan to that customer that gives them discounts on any repairs or parts as well as a yearly inspection. The customer then pays for the individual furnace and continues to pay monthly for the maintenance plan.
5. Charge late payment fees
Let’s face it. Waiting for months for payment, or having to hound customers for payment is really frustrating and it can leave you high and dry in the cash flow river. Introducing late payment fees can encourage customers to pay more promptly, which will help with cash flow. If they don’t pay on time, well, there’s an extra little bit of income.
Before instituting this policy, be sure to discuss it with your entire team and financial advisor. Depending on your clients and your relationships with them this may not be a good practice to put in place.
6. Lease, instead of buying
Need a company fleet of cars? Lease them instead of buying them. Need a heavy duty copy machine? Those can be leased too. In fact, leasing copiers and printers can sometimes also include a maintenance contract, which may save you a lot of headache. Buying certain things for your office space can take a big chunk of cash, so see if there are any rent or lease options available instead.
7. Don’t slack on the invoices
If you don’t send out an invoice, you won’t get paid. Period. It’s your own fault if you haven’t received a payment for a job completed 3 months ago and you haven’t sent the invoice yet.
Put a system in place for when and how invoices are sent out to ensure that it happens regularly. Similarly, it’s a good idea to have a system to look back and see what invoices have been paid or not on a regular basis instead of waiting until your cash needs are dire.
8. Take out a bank loan
Sometimes you need a lot of cash. Maybe you are just starting out, or maybe you’ve had a rough few years–but the above strategies just won’t cut it. When that happens, you can check out banks or other types of lenders/investors (angel investors, friends/family etc…) to help you out.
Despite the prevalence of credit cards, the emergence of things like bitcoin, and the ability to pay for your coffee with a watch, a positive cash flow is still imperative to business success.
Do you have any more ideas for increasing cash flow? Let us know in the comments!
For more financial advice, contact us at Lumen Advisory and Finance.