Cash flow is the net amount of money moving in and out of a business. There are two types of cash flow, positive cash flow and negative cash flow. Positive cash flow occurs when the amount of cash coming into your business is greater than the amount leaving due to expenses and accounts payable. Establishing a positive cash flow ensures business owners the ability to pay their bills, invest in their company, return money to shareholders and save for any future expenses. Negative cash flow occurs when the amount of cash leaving your business is greater than the amount coming in. Poor cash flow management is one of the main reasons many small businesses fail. Businesses who have more cash going out then coming in may have to make adjustments to their business plans such as borrowing more money or cutting costs. It takes hard work to achieve a positive cash flow. Business owners should analyze their costs and expenses and project their sales to plan for their businesses success.
5 Tips to Manage Cash Flow
- Use cash flow templates
Cash flow templates are available online for business owners to test different scenarios that may occur and how their cash flow will be affected. Cash flow templates will help business owners to analyze their costs and sales projections. A basic yearly cash flow chart keeps track of a business’s cash receipts and cash paid out which includes purchases, wages, repairs, rent, utilities and any interest paid.
- Factor your accounts receivables
Accounts receivable factoring can increase a small to midsize businesses cash flow. Receivables factoring is a type of financing that frees up a business’s capital and is helpful for businesses who have slow paying customers. In other words, the service was completed or the product was delivered but the client is taking a long time to pay. Businesses can receive funding within 24 hours and up to 97 percent of the original invoice amount from factoring companies.
- Train your customers
Your goal as a small business owner should be to collect payment from a customer shortly after the service was completed or the product delivered. Although your customers may have up to 60 or 90 days to make the payment, you probably want it sooner. There are a few things you can do to get paid faster.
- Send a reminder letter or email shortly after receipt asking for the payment
- Send frequent notifications to customers demanding payment
- Be in constant communication with your customers
- Don’t suggest it’s okay to wait until the deadline to complete a payment
- Offer a small discount [2 percent] for paying quickly
- Increase sales
It may seem simple, but increasing sales will greatly increase your cash flow. Put all of your efforts into increasing sales and you will see your cash flow rise. Maybe you need to focus on a better marketing strategy or improve your customer service. Acquiring new customers is crucial to your businesses success, but marketing also takes a lot of time and money. If you can’t afford to increase marketing, it’s helpful to look into strategies that include selling higher volumes to your existing customers to increase your cash flow.
- Maximize cash inflows and shrink outflows
Small business owners have many options when it comes to maximizing their cash inflows:
- Require a security deposit on products or services
- Seek additional payments for repairs or modification not included in the initial contract
- Offer some sort of subscription such as an ebook or newsletter that contains helpful information for a small fee
- Offer layaway for products that are expensive so the customer can make payments and pick up the item when they have paid it off
To decrease cash outflows, business owners can:
- Repair equipment instead of replacing it
- Purchased previously owned equipment
- Don’t upgrade equipment if it’s not completely necessary
- Trade your products and services with others in your industry
Building and maintaining a strong cash flow will provide the flexibility for business owners to handle any challenges they may come across. It’s important to always have enough cash saved to cover a few slow months that may come each year. It’s recommended by the US SBA to have at least 3-6 months in your reserve for when you may need it.
In need of factoring to improve your cash flow? Give us a call today for a free quote at 844-299-3206.