How’s business? For most companies, the answer changes by the month. After all, few businesses maintain consistent revenue throughout the year. But if you’re consistently struggling to pay the bills, you likely have a problem with cash flow, or moving cash and cash equivalents in and out of your business. Here are 13 tips for solving your cash flow problems.
13 Tips to Solve Cash Flow Problems
Use a Monthly Business Budget
Access a Line of Credit
Invoice Promptly to Reduce Days Sales Outstanding
Stretch Out Payables
Upsell and Cross-sell
Accept Credit Cards
Accept Online Payments
Maintain a Clear View of Inventory
Cut Costs by Identifying Waste
Improve Profit Margins with Vendor Discounts
If your business is seasonal or cash flow tends to follow a cycle, an annual budget and accurate cash flow statement can shed light on just how much money you’ll need each month to pay recurring bills. You’ll need to save money from the high-revenue months to cover overhead during lower-revenue months. A monthly cash flow forecast can reveal potential shortfalls and give you time to seek extra cash if needed.
If you have limited cash flow, one solution is to set up a line of credit. Like with a credit card, you’ll have money to spend that you can pay back during better months in your business cycle. Unlike a term loan, you’ll only pay what you use, along with interest on the outstanding balance. Best of all, once you’ve paid it off, your line of credit replenishes and is available again when and if you need it.
While your business may offer clients 30- to 60-day payment terms, you may need the money sooner in order to pay bills, order inventory, etc. In this case, you can’t afford to wait for the payment deadline. One solution is to offer your clients a discount in exchange for earlier payment. Alternatively, you could use invoice factoring. This financial product enables businesses to sell accounts receivable at a discount to a third-party factoring company. The factoring company advances up to 90% of the invoice upfront and takes responsibility for collecting payments.
Extending the payment cycle of your suppliers is a common way to obtain cheap financing. With this strategy, you simply choose to pay certain bills past their due date. However, it’s not a long-term solution, as it can impact your credit and sully your relationship with suppliers.
There are two ways you can protect yourself should you decide to stretch out payables. For one, you can negotiate the due date to a date on which you are confident you can pay. Or, you might want to reconsider your payment agreement altogether. Some service providers will allow for annual or semi-annual payments instead of monthly. Paying annually upfront might even net you a discount.
Is overspending putting you in the hole? Many businesses approach this problem by cutting the largest expenses, such as inventory, marketing or labor, first. That’s a mistake, as these are typically core to business operations. Instead, consider cutting nonessential costs such as landscaping or housekeeping first. Then, audit your overhead expenses, including rent and utilities. See where you can cut back, get better rates or renegotiate contracts.
Selling products or services at too low a price can negatively impact your margins. Take a step back and audit your products and services to determine the fully loaded cost of delivering them. With that cost in hand, you can determine whether you are charging too little and hurting your bottom line.
While many businesses balk at the idea of raising prices and potentially alienating customers, research shows customers are more likely to accept a price increase if it comes with an improved experience. According to Price Waterhouse Cooper, 43% of consumers would pay more for greater convenience, and 42% would pay more for a friendly, welcoming interaction in-store. It pays to test things out for best results.
Start with your top sellers or those that have less competition in the marketplace. If it doesn’t hurt sales, you can go ahead and roll out increases across the rest of your product line.
Increasing sales is an easy way to boost your cash flow. It’s even easier when you’re selling to customers who are already fans of your products or services. Two classic approaches: upselling, or selling upgraded and more expensive products or services to the same customer, and cross-selling, or finding ways to sell different products and services to the same customer. For example, a gym might consider upselling a six-week training package with a new membership deal. And ecommerce sites often cross-sell their customers under the header "You might also like...”.
Both techniques hinge upon making the sales pitch natural, or not making the customer feel pressured. Your goal is to keep existing customers happy and buying your products or services.
Accepting credit cards translates to quicker payments and fewer bad debts. It also improves the likelihood of purchases. A Square survey reported that 35% of consumers would shop elsewhere if a business didn’t accept credit cards. However, credit card companies typically charge a fee to merchants that use their service, so you’ll need to weigh those costs against the benefits of quicker payments.
Some 90% of small businesses accept credit cards, according to a 2019 Bank of America survey. The same survey showed that more than half of customers use credit cards in person or online when buying goods or services from a small business.
Just like credit cards, an online payment option—and an ecommerce shop in general—makes shopping more convenient for your customers. It also can help you move inventory more efficiently. Take, for example, a walk-in bakery business. There’s little control over how many pastries it sells or throws out on a given day. If that same business moves ordering online, it can save money on its storefront, bake to order, and perhaps even ship nationwide.
If you’ve got a product-based business, you know that you need to keep tabs on how much merchandise is on-hand. If you don’t have a clear sense of how much inventory you have at any given time, you run the risk of overstocking, thereby creating waste and tying up cash flow in that stored stock. Consider investing in an inventory management system that integrates with your accounting software. That way, you’ll maintain a real-time view of how much stock you have on-hand, how much you paid for each product, how much you actually need at any given time and more.
Plan & Forecast
Are you adding unnecessary materials like tissue paper and branded bags to your products? It may be time to slim down your packaging. Are certain products moving slower than others? Consider phasing out and focusing on your top-selling products instead. Are payroll costs becoming a drain? Consider cutting overtime and excess staffing as much as possible.
If you’re a good customer, your vendors may be more than happy to cut you a break. Or, they may throw in perks such as free shipping or extra products, especially if you’re buying in bulk.
Are you on top of your invoicing? The more promptly you send out invoices, the quicker you’ll get paid. And, in turn, you’ll benefit from healthier cash flow. If invoicing is consistently lagging, it may be time to invest in accounting management software. The best accounting software helps you ensure accurate, timely invoices while avoiding potential errors from manual bookkeeping. You’ll have a dashboard with a real-time view of all transactions and an electronic trail of all related records, which will come in handy when it’s time for auditing.