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10 Tips To Improve Your Cash Flow

Depending on whose definition you listen to, we’re either at the start of a global recession, or very near one. This means tough times are ahead for a lot of businesses. During the last global recession, between 2008 – 2010, more than 170,000 U.S. businesses filed for bankruptcy. Unfortunately, the numbers appear to be trending equally as bleak now. In January of this year, 60% of all U.S. businesses reported they were experiencing financial stress.

Whether we’re in a recession, or a period of economic boom, a great indicator of a healthy business is positive cash flow. However, for several reasons, many businesses struggle managing their cash flow. 

Below we’ll discuss 10 tips you can use at your business to improve your cash flow and increase your chance at success and longevity as we move into this period of economic uncertainty.

1. Better AR Management

Making sales is great, but sales don’t keep the lights on. Collecting those sales and turning that AR into cash is what will keep your business afloat. But often times business owners can get so caught up in all of the other components of running a successful business, that staying on top of their AR get’s moved down the to-do list.

As a result, the collection cycle gets longer, delinquent invoices and ineligibles begin to grow, and business owners start to ask themselves, “Where’s all the cash gone?” Instead of asking yourself that, implement good controls and consider these tips that are proven to help better manage your AR and improve your cash flow.

1) Offer early payment discounts

Incentivizing early payment comes at a cost, but the quicker cash flow can often outweigh the cost of the discount. As a business, come up with what benefits you the most. Customers looking to reduce cost can be inclined to take advantage of the discount period.

2) Charge and enforce late fees

Similarly as it’s important to incentivize early payment, it’s also important to disincentivize late payments by charging and enforcing late fees. If you let an invoice with 30 day payment terms slip to 45 days with no late penalty, guess what? In the minds of many businesses, those 30 day terms just became 45 days moving forward. 

Never be afraid to ask for the money you’re owed. “The squeaky wheel gets the grease” adage is true a lot in business, and especially true when it comes to collecting receivables.

3) Shorten payment terms

Ultimately average payment terms vary from business-to-business and industry-to-industry, but its important to make sure yours are not too long or you’re missing out on vital cash flow.

4) Accept electronic payments

Checks are slow and can get lost. This not only hurts your working capital, but also costs you additional time tracking the check down and depositing it at the bank. Many accounting softwares, like Quickbooks Online, make accepting electronic payments easy. Do your business a favor and accept electronic payments whenever possible.

5) Invoice accurately and on time

As a business owner, you’re often busy running around tending to the countless things needed to run a business, and some less important things can get moved back on the to-do list. Don’t let invoicing be one of those things! The sooner you get accurate, detailed invoices delivered to the customer, the sooner you will get paid.

2. Increase Pricing

With rising costs across nearly every point in their supply chains, margins are becoming slimmer and slimmer for many businesses. However, businesses can be reluctant to raising their prices for fear of losing customers. 

With most anything in business, avoid being reactionary, and be strategic instead. 

To determine if you need to raise prices, first start by reviewing all of the current costs that go into making your product or service to calculate your updated cost. 

Once that is known, evaluate at what level you would need to raise the price to meet the financial goals of your business. 

Next, do a little bit of market research on similar products or services to find out what the competition is charging because, ultimately, regardless of what your new costs are, the market will only pay what it can handle.

If you discover that your new, tentative, pricing is higher in comparison to what else is on the market, you’ve got to decide whether you can:

  1. Afford to lower your price 
  2. Whether you can differentiate your product or service enough to substantiate the price difference in the consumers’ mind or
  3. If you need to pivot away from this product entirely. 

It’s important to think through each step in thoughtful and strategic way so you can ensure you position your business for success.

3. Liquidate Old Inventory

Wouldn’t it be great if you could perfectly predict customer demand  and buy the perfect amount of inventory? Unfortunately, that’s not the case and, at some time or another, the majority of businesses end up with some old, slow-moving inventory. 

You could hold onto it, hoping it eventually sells, but there’s costs associated with carrying that inventory. That makes it not worth it for many businesses, as they need the cash. 

Instead, consider offering the old inventory at a discount to move it quicker. The discounted sales mean immediate cash flow for the business – cash flow that can be spent on higher margin, or quicker turning, products.

4. Scrutinize Every Expense

This one goes without saying, but as cash flow becomes tight, it’s important to scrutinize every expense within a business. You can’t change your spending habits around a lot of categories – you’ve got to pay your employees and you’ve got to pay the electric bill to keep the lights on. 

However, certain discretionary items should be scrutinized during periods of financial hardship. Discretionary spending should be cut and all major purchases should be approved. It also may be time to cut back on travel, meals & entertainment, or put off that future capital expenditure. 

These items just listed all serve their own purpose within organizations, but may not be immediately necessary. And during a cash crunch, it’s all about survival. Any items not immediately needed should be deferred to the extent possible.

5. Maintain Lower Inventory

Inventory is one of the largest costs for most businesses. However, too often, businesses hold more inventory than necessary, tying up all their cash. No one has a crystal ball to predict the future, but what you do have is all of your historical sales data at your disposal. 

By using your historical sales you can create a product sales forecasts. You can then take other known variables such as supplier lead time, and safety stock requirement, to create a strategic inventory management system. With this system, you can determine re-order points to know precisely when you need to buy inventory, and how much to buy.

Here’s an example. Let’s say you sold 100 units per month last year and you expect sales to rise 25% this year. You also know it takes 30 days for the product to arrive once purchased, and your policy is to maintain a 50% safety stock. 

You could take a safe guess and buy a 1,000 units. You probably won’t run the risk of running out of inventory, yes, but this also creates separate issues. First, now you’ve got several extra months worth of inventory tying your cash up. Second, what if your sales forecast was wrong and the demand for that product drops off? Now you’re stuck with inventory that you’ll likely end up selling at a steep discount down the road.

Instead, take a strategic approach.  According to your sales forecast, you expect to sell 125 units a month. You’ve got a one month lead time, and need to hold 50% safety stock. This equates to a required inventory balance of 188 units – significantly less than the wild guess example!

Implementing inventory management system to carry the appropriate inventory balance for your business can have huge impacts on cash flow and is something that is constantly reviewed and updated in successful organizations.

6. Restructure Existing Debt

Principal and interest payments to banks and other lenders often make up some of the largest payments made by businesses on a month-to-month basis. A downturn in business, or the economy as a whole, can leave business owners stressing about how they’re going to come up with enough cash to make those big payments. 

From my experience working through turnarounds with several financially distressed businesses, one of the last things a lender wants to do is to come take the keys and liquidate the business. They will often times go above and beyond and look for creative ways to help a struggling business out; however, they need to protect their collateral. So it’s important to be honest and open with your situation, as communicate the plan you have in place to remedy moving forward. By doing this, this will allow your lender to go to work for you and look for creative ways to potentially reduce debt payments.

We’ve worked with several clients experiencing financial distress that were able to successfully restructure their existing debt and decrease their monthly payments. But that couldn’t have been done without open communication with the lender and having a detailed plan in place.

7. Negotiate with Vendors

Purchasing inventory and supplies are crucial for a business, and it’s important to make sure they aren’t overspending. Just as it’s vital for a business to mange it’s Accounts Receivable and shorten the cash collection cycle, it’s equally important to manage the Accounts Payable in an effective manner to improve cash flow. 

One of the best ways a business can manage AP is to negotiate favorable terms with key suppliers and vendors. Too often businesses accept the terms as initially stated by their vendors.  It’s important to remember, negotiating is always about leverage. For example, if you’ve got a long-standing relationship, are buying in bulk, or have a comparable vendor lined up, vendors will likely entertain reasonable offers for different payment terms. 

Asking for an additional 10 days past the due date, or an extra percentage discount if paid early are common examples. These may seem small and inconsequential at first glance, but it’s these types of small, incremental changes that add up to have a large impact on a business’s bottom line when done consistently. 

Remember – the answer is always no if you don’t ask!

8. Personnel Cuts

No business owner enjoys letting employees go, but it’s an unfortunate reality that will come up from time-to-time for many businesses. Frequently, these are longstanding employees who’ve been instrumental in the company’s past successes. They’re not just names on a payroll register, they’re friends or family members of the business. Deciding who, if anyone to layoff, would keep most owners’ or managers up at night. 

Unfortunate as it may be, reacting too late to down-sizing can be very costly, and difficult to recover from. Payroll is the number one or two cost for the majority of businesses, but it’s also often the most bloated and the one most available for immediate cost savings to combat periods of poor financial condition.

What I like to remind clients facing this decision is that sometime it takes right sizing the organization today in order to save everyone’s jobs in the future. It’s a tough decision, but one that needs to be assessed and made quickly. You can always re-hire or add the positions back once the business supports that level of payroll.

9. Request Deposits

Large projects that take a while to complete can put a business in a bind and make it tough to make ends meet while the project is being completed and payment is waiting to be collected. To alleviate the gap in cash flow, it’s a good idea to require a deposit on these types of projects for multiple reasons.

1) Provides working capital

This reduces the financial burden on your business because you know longer have to fund the entire project from start to finish.

2) Lessens the chance of non-payment

Bad debts and non-payments are an unfortunate reality to running a business. However, by requesting a deposit can lessen that chance because it weeds out the customers who are more likely to not pay their invoice. If a potential customer has an issue with paying a deposit on a project, there’s a higher chance that they’ll not pay the invoice when it’s due. 

3) Increases customer involvement

Customers who have already invested money upfront are more likely to also invest their time into making the project successful.

How much deposit should you ask for varies from customer-to-customer and industry-to-industry. For example, if you have a longstanding customer with good payment history, and a job you expect to take 30 days, you would probably be ok with accepting a smaller deposit (30%) than you would with a new customer and a 45 day project. A good rule of thumb is between 20% – 50%. 

Always adhere to your company’s credit policy when evaluating customers and the required deposit. It’s never a great idea to bend your rules just to land a sale as it increases the chances you’ll get burned!

10. Maintain a Cash Forecast

To run a successful business, it’s important to be prepared to the extent possible. Most successful businesses maintain a detailed cash forecast to give them an idea of their upcoming disbursements and collections.

A common practice we employ at clients in a cash crunch is implementing a 13 week cash flow model. A 13 week cash flow is a financial projection that forecasts a business’s cash inflows and outflows, by category, over a rolling 13 week period. The model is useful because it gives a “big picture” look at the projected cash flow, week-to-week, to spot if & when they will run into trouble. With that information, they can make strategic decisions now to avoid any cash shortfalls.

We recommend working with your CFO to put a detailed cash forecast in place and to have it updated constantly so you can minimize surprises and stay on top of your finances.

Need Help Managing Your Cash Flow?

Working with one of our high-quality CFOs to manage your cash flow will help your business avoid some of the pitfalls described in this article.

Check out our CFO Services page or schedule a consultation to speak with one of our finance experts to find out more ways one of our Fractional CFOs can help your business grow.

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