How to Improve Your Business Cash Flow

7 min read
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Executive Summary

Steady cash flow is to a company as water is to a tree. Without a healthy circulation of money, a business will either wither and die or stagnate and fail to bear fruit. While many business owners emphasize the importance of revenue, they often underestimate the significance of their margins in the face of operational costs like wages, rent, stock, and utilities. 

Disclaimer: Our first priority is giving you the best financial advice for your business. Tillful may receive compensation from our partners, but that doesn’t affect our editors’ opinions or recommendations in the content on our website. Editorial note

Steady cash flow is to a company as water is to a tree. Developing a policy with clear cut payment terms and contingency plans will put you a step ahead of the game when seeking to bolster your business cash flow. Without a healthy circulation of money, a business will either wither and die or stagnate and fail to bear fruit. While many business owners emphasize the importance of revenue, they often underestimate the significance of their margins in the face of operational costs like wages, rent, stock, and utilities. 

Drawing honest conclusions when looking at your company’s historical data will allow you to be realistic when you create cash flow forecasts. It will allow you to strategize when unknown internal or external factors disrupt your operations, taking into account market and industry trends. This is especially true if you are doing business in a disrupted industry. 

Developing a policy with clear cut payment terms and contingency plans should things head south, will put you a step ahead of the competition when seeking to bolster your cash flow.

 

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undraw progress data 4ebj 1

Tip 1: Periodically update your cash flow forecasts

Periodically analyzing spending patterns in your balance sheet will give an accurate record of how your business is doing and where it can improve. You have to know where you came from to know where you’re going. If you can identify patterns in your balance sheet, it then becomes easier to optimize your cash flow. You’ll have a bird’s eye view of where your business is bleeding and where fat can be trimmed, as well as how well each of your products or services is contributing to your revenue stream.

 

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undraw online transactions 02ka

Tip 2: Streamline invoicing by going digital

Send your invoices right away and get your customers to pay their invoices on time. The longer it takes your business to collect your receivables, the longer it will take to process payment. Inefficient administrative chores waste time that can be spent on growing and reinvesting into your business, presenting a significant opportunity cost. We’re two decades into the 21st century — high time to choose the digital option and transition away from manually filing invoices. There are a few apps that present two advantages by making it a matter of clicks both for you to send your invoices and for your customers to pay up.

 

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undraw receipt ecdd

 

Tip 3: Make it clear how you want your customer to pay

Define your payment terms in as clear-cut language as possible. Specify acceptable methods of payment and installment plans if available. Have strategies in place that instruct your employees on standard operating procedure should a customer fail to make payment in time, and use apps to set up notifications for overdue payments.

It is also better to move away from checks as they are an outdated and inefficient payment method compared to digital payment gateways available today. Manually filling checks at the bank takes time and requires physical travel. It is much more convenient for you and your customers if your business is capable of accepting payment via card or bank transfer or through digital payment gateways.

 

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undraw stripe payments o7aw

 

Tip 4: Streamline your point of sale (POS) and accept payments everywhere

Buying an integrated payment terminal, like Twitter founder Jack Dorsey’s Square, will streamline your payment process while increasing the range of payment methods your business can accept at a marginal cost. It will allow you to start accepting payments from credit, debit, and RFID cards, and phones with NFC software, all on a single device. This eliminates the need to spend time figuring out which machine works for which card, or for your customers to scrounge up exact change.

If you run an online store, you can extend this ethos even further and start accepting payments through a mobile point of sale (POS) system. As the developed world and parts of the developing world move towards cashless societies, online purchasing can be done virtually anywhere. Not only does this remove the risk of having cash lost or stolen, but it also outsources the issue of settling payments to the gateway and your bank.

 

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Group 2

Tip 5: Don’t sell yourself short on your price

Be bold enough to increase the price of your products and services if your cash flow isn’t as smooth as you hoped. This means reassessing your balance sheet and seeing if operational costs have changed. It also means doing market research to understand what your competitors are charging. However, you must also be realistic with your price adjustments by examining the market rate and considering how price-sensitive your target demographic is. If you hike up your prices too fast without adding value to your services or offering new amenities, your customer base will likely abandon you for a competitor.

 

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undraw revenue 3osh

Tip 6: Know when and why to take out a loan

Sometimes the most profitable solutions sit just around the corner, and all you need is a bit of seed cash and to think outside the box. This may mean taking out a cash flow loan if you’re planning to expand your inventory or service range. Short-term loans usually entail a lump sum of money, which is reimbursed through regular installments over weeks or months, so make sure to have an accurate cash flow forecast before you start borrowing.

A loan will allow you to take on new projects and upgrade equipment, so if you’ve done your due diligence and know your expansion will improve your profitability, it might be worth considering taking the loan. Running a coffee shop? Start selling artisanal tea. Operating a co-working space? Set aside an event space for seminars. If you switch up your pricing schemes while offering an improved product range that fulfills a need, you’re creating value that can be sold.

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undraw bear market ania

Tip 7: Re-evaluate your operating expenses for booms and busts

Consider Murphy’s Law — Anything that can go wrong will eventually go wrong. We are living it now with COVID-19. Unpredictability is a quality of the human element that defines the order and structure essential to running an efficient business. As such, it’s crucial to account for unexpected events and unknown contingencies by setting aside three-to-six months’ worth of operating expenses as a buffer.

Growing an SME is an ambitious venture that will often involve hiking marketing costs, equipment upgrades, and taking out loans. Making room for ambitious growth in your initial forecast will give you more wiggle room during execution. This means planning for all contingencies — including scenarios where your business isn’t doing too well.

What to expect

In a nutshell, improving your cash flow requires you to make things as convenient as possible for your customers and your employees while maximizing efficiency and taking calculated risks. Once you’re able to streamline your POS while taking into account the possible bumps along the road, you’ll be ahead of the curve. Conduct due diligence when forecasting, define your payment terms clearly, and you’ll manage your cash flow like a champ.

 

About the author

Ken So

Written by Ken So

Ken is the Founder and CEO of Flowcast and Tillful. Having spent most of his career before Tillful in tech and investment banking, he covers all things business credit and finance with a twist of insider knowledge.

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