11 Cash Flow Tips to Help Improve Your Bottom Line
June 1, 2022at9:00 AM
by Jason Campbell, CPA
Are you looking for ways to improve your business's cash flow? If so, you're in luck! In this blog post, we will discuss 11 tips that will help you manage your finances and improve your bottom line. The need to improve your cash flow is essential to the success of any business. With these tips, you can take control of your finances and make your business more successful!
1. Start with a budget.
How do I improve my cash flow? Well, it's hard to know why you have negative cash flow if you haven't created a budget. A budget helps you figure out where your money is going and how much you spend on different things. So the first step to improving cash flow should be creating or updating your business's budget.
Many small business owners run their business based on their bank account instead of using financial statements and budgets. It makes it almost impossible to create positive cash flow when a business is operating this way. Positive cash flow means you're earning more than you spend. They need to have a budget in place and should track their spending against it regularly.
If you don't know where to start, try creating a budget based on income and expenses first - then adjust accordingly to meet your goals. This next tip should help give you a starting point.
2. Implement a cash flow management system
If you want to improve cash flow, get started right away. To effectively manage your cash flow, you'll need a system that helps you monitor your finances and keep track of what's going out versus coming in. This will help you identify areas where you need to make changes to improve your overall cash flow situation.
You may be thinking, "I don't have the time to set up my accounting system." But this is quite easy with accounting software like QuickBooks or FreshBooks (both low cost). These programs allow for easy tracking of expenses and income so that you can see where your money is going at all times. Many programs have templates that will help you get started quickly and easily. And if you're feeling overwhelmed, there are plenty of accounting professionals out there who would love to help -- just make sure they understand your particular needs before hiring them.
However, if cost is an issue or you simply want something simpler than most other options, then spreadsheets might be the way to go. Ideally, you want an accounting software to keep track of your cash flow needs but implementing some kind of financial system can help organize everything into one place so it's easier on both parties involved (you and whoever else needs access).
These are just a few examples -- there are dozens more options out there! So don't let the lack of time prevent you from taking control over how much gets spent each month (or year). Cash flow is the lifeblood of any business. If you can't manage it properly, then your company will not last long!
3. Analyze your expenses and find ways to cut back.
Take a look at your company's past spending and see where you can make cuts. This may be difficult, but it is necessary for improving the business's cash flow. There are likely areas in which you can save money without making any noticeable changes to the way your business operates. For example, renegotiate contracts with suppliers. The price you are paying them could be outdated and lowered simply through a conversation with them. This could also help you get out of a negative cash flow situation but you have to first understand your situation. Ask yourself when the last time you checked your pricing from your vendor contracts? It's important to have a good handle on your accounts payable.
You could also consider changing the way you do things - for instance, if you're currently paying invoices by check instead of electronically, switch to electronic payments to speed up the process (and save on postage costs).
Here are a few more examples of things to look at:
- Staffing costs
Compare the staffing cost to the industry average. If the average is lower, then you should look at ways to reduce your staffing costs. Maybe there are employees or job functions that are not essential or you could outsource some of the work.
- Office space usage
Look at whether your office is being used efficiently, i.e., are there unused rooms that could be rented out? Do you need all of the extra furniture and equipment in each room? Could they be stored away somewhere else?
Make sure employees are using space appropriately - if they are working from home, then this could be an opportunity to reduce costs!
- Software and subscriptions
Review the software you use daily: is there anything that's not needed or used anymore? If so, cancel it immediately. You should also look at any subscriptions you may have - for example, to a trade magazine - and ask yourself whether or not you need them. Oftentimes, subscriptions can be canceled without any negative consequences.
- Travel costs
Track your travel expenses closely and see where you could make cuts. Are there cheaper flights or hotels that could be used? Could some of the travel be done by train instead? Could meetings with clients take place over Skype or Zoom calls, so that no one is required to travel at all?
- Inventory and supplies
Review the inventory you have on hand: are there any items that could be stored elsewhere (i.e., a warehouse) without being needed immediately in your office space? Could any of the inventory be used less? Are there cheaper suppliers that could be used?
Are there ways to reduce the amount of electricity or water being used in your office? Could you install a programmable thermostat so that the temperature is automatically lowered during off-hours? Is there anything else that can be done to conserve resources without affecting productivity?
*The above list is by no means exhaustive - there are many other areas where you can cut back without adversely impacting your business's operations. The key is to analyze everything carefully and be sure not to make any rash decisions!
4. Make it a priority to get paid on time by your customers.
One of the best ways to improve your cash flow is to ensure that you're getting paid on time by your customers. This means issuing invoices as soon as possible after services are rendered or products are delivered and having payment terms that are strict but reasonable. It's also important to keep in touch with clients who have overdue invoices - sometimes all it takes is a gentle reminder for them to send over the money they owe!
Where is your money?
It's important to know what work you have completed and have not received payment from yet. If you don't have a good handle on your accounts receivable, you won't be able to make sound decisions about spending and improve cash flow.
If you are not tracking your receivables, this can lead to negative cash flow which means you are losing money in your business.
Now is the time to start. Using Quickbooks or Xero can help you keep track of the number of unpaid invoices, when payments are due, and how much money is outstanding.
If you are not sure where to start, contact a CPA or bookkeeper for help.
How to get paid?
If you're not already doing so, it might be worth considering accepting credit cards as payment from customers. This will make it easier for them and increase sales because they won't have to wait until payday before buying something from you!
Even offering an ACH option to customers will help generate positive cash flow for your bank account since you won't have any fees associated with credit card processing. Maybe offering a small discount to encourage them to use this option can help.
If your company offers credit terms to its customers, make sure you're not extending too much credit. It's important to find a balance so that you're not losing out on potential profits, but at the same time, you're not risking having some of your customers go into debt and ruin your relationship with them.
5. Negotiate better payment terms with your suppliers.
You should always review all contracts with vendors, especially those that have automatic renewals or recurring payments every month (e.g., subscriptions to magazines). Ask yourself if you need them and if so, consider finding cheaper alternatives.
One way to improve your business cash flow is by negotiating better payment terms with your suppliers. This could mean asking for a longer repayment period, or requesting that payments be made in installments rather than all at once. If you have a good relationship with your suppliers, they may be more likely to work with you to find a mutually beneficial solution.
Another option is to use a supplier credit line. This allows you to borrow money from your supplier to finance purchases from them (or pay off existing invoices). The advantage of this arrangement is that the interest rates are typically lower than what you would get from a bank, and there's no need for collateral.
6. Have money set aside for unforeseen expenses.
It can be tough managing cash flow when it seems like every day there's a new expense to pay for. It seems like there is always a drain on your bank accounts. The best way to make sure you're always prepared is by budgeting and saving up money every month to build an emergency fund that can cover any sudden costs without having them impact your business's finances too much. Make sure to open a savings account to house your rainy day funds.
You should always try your best not to borrow more than necessary (and never take out a loan unless there aren't any other options). However, if you don't have money set aside and things get tight financially, then borrowing some cash could help tide over the rough patch until income picks up again. The next solution could help if you typically generate consistent business with existing customers.
7. Use invoice factoring as a short-term financing solution.
If you're in a bind and need some extra cash quickly, invoice factoring could be a good solution. This is when you sell your accounts receivable (invoices) to a financial institution for immediate cash. The advantage of this arrangement is that you don't have to wait long periods for customers to pay their bills—the factor will take care of that for you.
The downside, however, is that the interest rates are typically higher than what you would get from a bank or other lender. So it's important to only use invoice factoring as a short-term financing solution, and make sure you have a plan in place to pay off the debt as soon as possible.
8. Find new sources of revenue or invest in new products or services.
If you're struggling with cash flow, then it might be time to find new sources of revenue or invest in new products/services. This could mean going after different customers (e.g., focusing on consumers instead of businesses), targeting markets that are underserved by competitors, or developing something innovative and unique for your business to offer potential clients.
Creating another stream of income within your business model can help improve cash flow. What other opportunities that relate to your service can you provide to customers? Examples include affiliate programs, reseller products and just creating paid products based on your experience.
It's also worth looking into sales tax exemptions for your business. Some states and cities offer these to businesses that sell certain goods or services in their jurisdictions, which can save you a lot of money over time (and improve cash flow).
9. Use forecasting for improving cash flow.
One of the best ways to improve your company's cash flow is by forecasting. A cash flow forecast is a detailed projection of your company's finances for a specific period (usually one year). This will give you a better understanding of how much money you need to bring in each month/quarter/year to stay afloat. This means creating a plan that outlines how much money you expect to bring in and where it will come from. By doing this, you'll be able to identify any potential problems before they become too big of an issue.
Forecasting can also help you make better decisions about pricing, inventory levels, hiring new employees, and more. It's not just a one-time thing either; it should be done regularly so you're always on top of what's going on with your business finances.
To do this effectively, start by using an accounting system which we spoke about earlier. When you have recorded everything, then come up with some estimates for how much money each category will bring in next year based on historical trends plus any special promotions that are planned out ahead of time such as holiday sales.
For example, if you know sales tend to be highest during certain months due to seasonal factors like Christmas or Valentine's Day then make sure those months are included in your forecast.
It's also a good idea to have an understanding of your company's average payment terms. This is the number of days it takes, on average, for customers to pay their invoices after they've been sent. Knowing this will help you better plan and forecast cash flow in the future.
To forecast more accurately, make sure you have a good understanding of your industry averages. For instance, if you're in the retail business then it might not make sense to expect sales during certain months like November-December when most stores are closed for holidays and there's less foot traffic.
You'll also need to take into account things like the current interest rates and how they might impact your business. All of this information can be found in industry reports or by speaking to an advisor.
Once you've got all of this data, it's important to create different scenarios so you're prepared for any situation that might come up. This will help ensure your cash flow forecast stays on track no matter what happens in the economy.
All of this can be challenging for medium to small business owners. That is why at JDC Enterprise Consulting, we look to help business owners get a clear picture of their financials so they can make more informed decisions. Reach out today for a free consultation on your business and see how we can help!