This is the fourth installment in our “Cash Flow 101” series—our ultimate guide to help you understand and manage your business’s cash flow, and prevent future cash flow problems. Need to catch up? You’ll find links to the previous installments in this series at the end of the article.
Businesses that are cash flow negative—i.e., those that pay more money out than they bring in—are at serious risk. Without positive cash flow, or real cash flowing into your business regularly, you’re at risk for cash flow problems. Keep in mind that cash and profits aren’t the same thing. So, if you’re doing a ton of business, but your customers are slow to pay on their invoices, you might still have cash flow problems.
The good news is that if your business is having trouble with cash flow, there are a number of things you can do to take control.
If you’re having trouble managing your cash flow, or if you’d just like to try and figure out how to improve it, consider these tips for better cash flow.
1. Know when to lease and know when to buy
Virtually all businesses need equipment, facilities, and property to operate; whether they should buy or lease those items is another question.
If your business is strapped for cash, you might want to consider leasing equipment and renting retail or office space rather than buying it outright. In addition to getting access to the materials and spaces your organization needs to be successful when you choose to lease those items, you won’t have to tie up significant chunks of your capital. In other words, your business will be better positioned to respond to new opportunities and address unforeseen challenges.
Once you’ve solved your cash flow problems, it might be time to look into whether more long-term arrangements, like buying office space, makes sense. Owning your property means your business will essentially be paying rent directly to you (or more specifically, your LLC)—and there are also tax benefits to take into account, too.
2. Make it a habit to shop around for better prices
How confident are you that you’re getting the best deals on your supplies, systems, and utilities?
While it’s probably counterproductive to shop around for new suppliers every other day, it might be worth reassessing your operations on a regular basis—whether that’s monthly, quarterly or even yearly will depend on the scope of your business.
In today’s competitive and connected marketplace, there certainly isn’t a shortage of businesses vying for your company’s dollars. But remember: it’s important not to pick new suppliers based on price alone. After all, if shipments don’t arrive on time or cloud computing assets aren’t always available, your business could very well take a hit.
So when shopping around for new suppliers, certainly look at the price—that’s how you’ll solve your cash flow problems. But be sure to consider a potential new vendor’s track record, too, before making a decision.
3. Consider increasing the prices of your products and services
When is the last time your company raised its prices?
While it’s probably pretty safe to say that a lot of your customers will likely be at least a little irked when you raise your prices, such is life. Most folks are already used to price increases: Each year, health insurance costs go up, rent increases, and consumer goods generally become more expensive.
So if you haven’t increased your prices in quite some time and you’re struggling to solve your cash flow problems, now might be the right time to bump them up—at least a bit.
But don’t simply increase them overnight; you don’t want to risk turning your loyal customers away. Instead, by carefully planning your price increases and marketing them effectively, you’ll be able to generate more revenue—and maybe even more sales—while padding your bottom line.
There are a variety of tactics you can employ to reduce the likelihood your customers will get angry when your business raises its prices. For starters, don’t increase your prices unless you’re sure that your customers are thoroughly satisfied. You can also consider trying to time your price increases with improvements to your products.
For example, a software-as-a-service (SaaS) company could consider upping its subscription fees after undergoing a major upgrade and rolling out new features. Beyond that, your business could bundle its services together for a lower average rate (much like cable companies do), encouraging customers to buy more than they otherwise might.
4. Invoice faster to get paid faster
It’s not uncommon for businesses to wait until the end of the month to invoice their customers all at once. But common sense tells us that the longer you wait to send out invoices, the longer it’ll take for you to collect on them.
If you’re having cash flow problems, you might want to consider accelerating your billing process. Possibly sending out invoices the moment when jobs are complete and orders are shipped. In doing so, you ensure that your clients get their invoices faster—which hopefully means you’ll get paid quicker.
5. Incentivize customers to pay sooner
Who doesn’t like paying less for products or services?
To solve your cash flow problems, you might want to offer customers favorable payment terms if they pay their invoices early. For example, offering 2/10 net 30 terms means your clients get a two-percent discount if they pay their bills within 10 days; otherwise, full payments are required to be made within 30 days.
Think about it: Would you be more inclined to pay your credit card bill the moment it came if you were able to remit less than the amount due to settle it in full? It might be worth taking a similar approach with your clients—particularly those who have developed reputations for being a little more hesitant to promptly settle their invoices.
6. Devise new campaigns to boost sales
If sales are stagnating—or even if they’re not—from time to time, you might want to consider retooling your campaigns. One need look no further than Coca-Cola’s “Share a Coke” campaign; back in 2014, it was credited with bringing the beverage company a two-percent spike in sales.
The best part? Coke didn’t have to do a whole lot to generate these new sales; the whole campaign consists of simply having names printed on bottles and cans, the idea being that customers would buy ones featuring their names, as well as names of their friends, coworkers, and loved ones.
If your business is struggling with cash flow, it might be time to go back to the drawing board and think about new, creative ways you can boost your sales. For example, restaurateurs could see how customers respond to new dishes or new cocktails, or web design firms may find an uptick in revenue if they include the creation of a free logo with their website development packages.
No matter your vertical, switching things up a little bit may very well direct more attention on your brand, bolstering your bottom line—without necessarily costing you that much.
7. Review your cash flow statements
Though they might seem cumbersome from the outset, believe it or not, regularly reviewing and analyzing your cash flow statements can reduce the likelihood you’ll encounter unexpected cash crises. To see a visual example of how cash flow works within a business, you can download this free cash flow example PDF or Excel sheet.
Generally speaking, cash flow statements track a business’s cash inflows and outflows relating to its operational activities, its investments, and its financing activities. If you’re writing a business plan for a loan, your lender will expect to see a cash flow statement there. If you’re not writing a business plan, reviewing your cash flow statement regularly is one of the best things you can do to position yourself to make smart major spending decisions.
It’s a way to avoid the guesswork and feel confident about making the right adjustments to your business—whether that’s increasing prices, reducing expenses, or embarking on new campaigns.
8. Leverage modern technology
There’s a reason Slack, a web-based collaboration tool, is valued in the ballpark of $23 billion: It provides businesses with a ton of utility, allowing all employees to stay connected and be more productive, no matter where they happen to find themselves.
In other words, Slack increases business output, and many decision-makers consider it a worthwhile investment for increased productivity.
If your cash flow is suffering, you might not want to invest in new technology; spending money when your purse is nearly empty may seem counterintuitive, but facts are facts.
The right technology makes your employees more productive. It follows that you’ll have more goods and services to sell than you would when relying on outdated technologies. Also, consider this: You have to assume that your competitors are investing in new technology. So if you’re not, the ball is most assuredly in their collective court.
9. Remember that cash is different than profit
It’s true that many business owners open up their doors for the same underlying reason: to turn a profit. But chances are your business will have a considerably more difficult time if you’re constantly struggling to pay your bills.
Businesses can be profitable on paper and still be so cash-poor that they close down. Until your customers pay their invoices, you can’t pay your bills. Pay attention to your accounts receivable—or the money you’re owed for the goods and services you’ve already delivered. If that number gets too high, your business, and your cash flow, are at risk.
Cash Flow 101: Tactics for Business Growth
Need to catch up? Read the first, second, and third installments in the series here:
Cash Flow 101: What Is Cash Flow?
Cash Flow 101: How to Identify and Fix Cash Flow Problems