There's no getting around it — cash is king. And if you're business doesn't have enough of it, you could find yourself in trouble. If you don't already know how to improve small business cash flow, now is the time to learn. There are many options available to you, but some will fit your business better than others. The key is to learn about ways to improve cash flow and fix cash flow problems long before you have an issue.
Get on Top of Your Accounts Receivable
You can't pay your bills if your customers don't pay you, so take a hard look at your accounts receivable practices. If your suppliers give you 30 days to pay, you may need to give your clients only 15 or 20. When a client is late with a payment, send a friendly reminder followed by a past due notice. If this is ignored, don't hesitate to send the invoice to a collection agency.
Late payments can happen occasionally even with a dependable client. To try and hedge your bets, however, do what you can to make sure you're dealing with a dependable client before you extend credit. Do perform credit checks on potential clients and deny credit if things don't look good. It can feel mean and difficult to tell a potential client no when they ask for credit terms, but your cash flow will suffer if you can't collect.
You can also opt for a receivables strategy that involves more carrots and fewer sticks. Offer customers a discount for paying early. If you're in a business where it's customary to do so, you can also ask for a deposit before beginning a job. This is common in the home improvement trade since you'll likely need to buy supplies before you can begin a remodeling or roofing job.
Get Your Existing Customers to Buy More
While expanding your business and reaching new customers is important, don't forget the customers you already have. Try and think about how to increase average spend per customer for the clients you already have. Is there a product or service you could bundle with an already popular product? Would your customer be willing to enter into some sort of monthly subscription service? Can you sell a service contract? Service contracts can provide a great cash flow boost because people pay for them every month or year and may not need to use them.
Loyalty and reward programs can also increase current customer spending, as can selling gift cards. The goal is to offer your customers more value along the way so they feel good about spending a little more. Make sure you're bundling products and services that make sense together or offering useful loyalty rewards. You're looking to increase your sales, but your customers will also want to see a benefit.
Increase Your Prices
Competitive pricing is a great way to attract customers, but not if you're going so low that it hurts you. You don't want to slit your own throat, of course, but you also don't want to charge $15 for something customers would happily pay $20 for. The trick here is to watch your sales as you increase your prices. Figure out when sales slow down and keep your price just below that number. Unfortunately, there is no magic formula here. Finding the best pricing usually involves a lot of trial and error.
It also sometimes involves the courage to drop a product that just doesn't generate profits. Just because you love a certain product doesn't mean your customers will. Eliminate products that don't move or that customers only buy when you discount the price enough to kill your profits.
Get a Line of Credit
No discussion about how to improve small business cash flow is complete without mentioning a line of credit. A line of credit is basically a potential loan sitting ready at the bank. You can dip into this safety net when and if you need to, taking only as much or as little as you need to cover a tight spot.
You should be watching your cash flow closely so you can anticipate any possible shortfall and stop it before it happens. But sometimes unexpected events can pop up and put a dent in your cash that you weren't planning on, no matter how well you keep an eye on things. COVID-19 shutdowns were a prime example. Consider having a line of credit available just in case.
Join or Form a Buying Co-Op
You may be a small business, but you don't have to shop like one. Many vendors offer quantity discounts and other perks to customers who place large or frequent orders. You can put that purchasing power to work by making purchases with other small businesses that need the same supplies you do. Because they buy so many, for example, large hospitals may be able to get helpful quantity discounts on exam gloves. A small family practice may miss out on these discounts, but 20 practices buying together may be eligible.
Utilize Payment Technology
This trick works both ways. When dealing with accounts receivable, accepting electronic payments makes it easy for your customers to pay you. And electronic payments get processed faster by your bank, getting the money into your account sooner than a paper check. When deciding how to improve small business cash flow, it's important not to overlook these little things. It may not seem like a lot, but accepting an electronic payment saves having to pay someone to sort and open the mail, match the paper checks to the correct invoices, and draft a bank deposit. That savings can really add up over time when you think about how many invoices you generate.
The same is true when handling your payables. You can use an electronic payment system to pay vendors on your invoice due dates without worrying that the mail will make your payment late. This lets you hold onto your money longer without fear of a penalty. You'll also save money on checks since you won't need to write near as many.
These small business cash flow improvement methods are all worth considering, but they certainly don't represent all of your options. If you want to learn more about improving your cash flow and other small business tips and tricks, we encourage you to sign up for our digital marketing newsletter today. We're always looking for and sharing new ways to help you run your business more effectively, efficiently, and profitably. We know you work to live rather than live to work, and we want to help you work smarter so you can enjoy the freedom that comes with entrepreneurship.