10 Proven ways to improve cash flow in your business
As any small business owner knows, maintaining smooth cash flow requires juggling nearly every facet of a business, from staying on top of accounts receivable, to extending lines of credit, to managing inventory. The essence of successful cash flow management is regulating the money flowing in and out of your business. Increasing your cash flow reduces the amount of fixed capital that you need to support the given level of your business. Increased, consistent cash flow also creates a predictable business pattern, making it easier to plan and budget for future growth. Here are 10 things you can do to increase your cash flow:
- Organize your billing schedule
- Stretch out your payables
- Take advantage of early payment incentives
- Balance your client base
- Check your pricing
- Don’t buy all in one place
- Form a buying cooperative
- Renegotiate your insurance and supplier policies
- Tighten your inventory
- Consider leasing instead of buying
Organize your billing schedule
The faster your receivables turn over, the more capital you’ll be able to spend on growing your business. To help you bill early and often, put yourself on a billing schedule with an accounting software program like Intuit’s Quickbooks Pro or Peachtree Software’s Peachtree Complete Plus Time & Billing. These two programs can automatically classify the age of accounts receivable — fewer than 30 days old, between 30 and 59 days, between 60 and 90 days, etc. This kind of automated flagging system allows you to act immediately on overdue accounts.
Stretch out your payables
Take the maximum amount of time allotted (often 60 or 90 days) to pay your suppliers. Think of these terms as an interest-free line of credit from your supplier. It gives you sufficient time to collect receivables without spending money on short term credit lines.
Take advantage of early payment incentives
If your suppliers offer you a discount for paying early (usually within two weeks of receiving the bill), take them up on it. Think of it this way: a 2% on a 30-day invoice is equal to a 24% annual return if the money was invested. If your suppliers don’t offer this kind of incentive, ask for it; they may be willing to offer the discount in return for speeding up their receivables.
Balance your client base
Many service and professional companies — such as advertising or PR agencies, accountants, attorneys, real estate management firms, etc. — work with certain clients on a project-by-project basis. Look for ways to convert some of these clients to a retainer relationship, where they pay you a set amount of money per month for a certain number of services. You might want to offer them some kind of incentive — value-added services, a discount — to encourage them to shift to a retainer. This might reduce your profit margin, but it will help make your cash flow more predictable.
Check your pricing
Have your prices kept pace with your rising costs? When was the last time you raised your prices? Many small businesses hesitate to increase their rates because they’re afraid they’ll lose customers. However, customers actually expect their suppliers to institute small, regular price hikes. Also, be sure to check out your competition on a consistent basis. If they’re charging higher prices, you should too.
Don’t buy all in one place
You can save money by splitting your business between suppliers. Closely examine where you need to pay for added service, and where you can save money by paying commodity prices. For example, you might want to buy your computer hardware from a value-added reseller who can help you choose the right system to meet your business needs, while you can purchase other items — such as printer cartridges, cables, or off-the-shelf software — from a mail order catalogue or another price merchant.
Form a buying cooperative
Save money on supplies by rounding up a few colleagues and buying supplies like computer disks and printer paper in bulk, then divvying them up amongst yourselves. Or, if you don’t want to invest the time in forming your own, your local chamber of commerce or industry association may be able to provide you with contact names for buying cooperatives in your area.
Renegotiate your insurance and supplier policies
Are you getting the best possible deal on insurance, phone service, and other regular business expenses? Review each of your insurance policies annually and get three quotes for each to ensure you’re getting the most for your money. Keep a close eye on price sensitive services such as your long distance phone service or your Internet access service. Regularly examine these bills and call around to make sure you’re getting the lowest available rate.
Tighten your inventory
Overstocking inventory can tie up significant amounts of cash. Regularly gauge your inventory turns to make sure they are within industry norms. You can do this by calculating your inventory turnover ratio (cost of goods sold divided by the average value of your inventory). Avoid buying more than you know you need when suppliers lure you with big discounts; this can tie up cash. Periodically check your inventory for old or outdated stock, and either defer upcoming orders to use that stock or sell it at cost to improve your liquidity.
Consider leasing instead of buying
Leasing generally costs more than buying, but these costs often can be justified by the cash flow benefits. By leasing computer equipment, cars, or other tools you need to expand your business, you will avoid tying up cash or lines of credit that might better be used for running your business day-to-day. Lease payments are also considered a business expense, so the tax benefits are maintained even though the items are not purchased.