Cash flow is the lifeblood of any small business; however, it won’t magically manage itself. If you are here, you might already be feeling a cash flow pinch in your small business, but don’t feel bad or think you are alone. The reality is that more than half of all small businesses struggle with cash flow and many have less than 1 month of cash flow as a reserve to keep them afloat. To help you out, below are 13 of the best, most practical ways to improve and manage cash flow in your small business. As always, if you have a question or think you might want to work together, please get in touch through my Home Page. Also, never miss a blog by following me on LinkedIn or Facebook.
1) Prepare a Cash Flow Forecast/Budget – Something Basic is Better Than Nothing
If your small business is struggling with cash flow, the first thing you should do is prepare a cash flow forecast tool or cash flow budget. You stand the best chance of improving your cash flow if you understand it.
If you currently have no tool or process for forecasting cash flow, I would recommend building something basic in Excel or Google Sheets as a start that is weekly and extends 2 to 3 months. Start with your expected revenues by week and determine on average how long it takes you to collect your revenues. If you get paid right away for your services or products, your revenue cash flow will match your recorded revenue estimates by week. If you send invoices to customers to be paid afterward, enter those revenues as collectible in the 2nd, 3rd, or 4th, etc week depending on your collection history. From there and below your revenues on your Excel, enter your expected spending for things like purchasing inventory, paying for services, fees, loan payments, employee payroll, etc. Make sure you are reviewing payable / expense data from your accounting software so you aren’t missing anything important or large. Once you have the revenue and cost inputs ready, at the bottom of your Excel, start with what cash you currently have in the bank in the first column and add each week's expected cash movement. Note: If you are currently relying on a line of credit or other short-term debt (IE, your cash balance is negative), you will want to start with operating margin, or in other words, how much cash you can access in your first column. After you spend 4 to 5+ hours, you should have a rough idea of your cash flow forecast in the short term.
2) Analyze Your Cash Flow Forecast/Budget
If you took the time to prepare a cash flow forecast/budget, you should take the time to understand it and learn from it. For example, think about what changes you think about in your small business to improve certain aspects of the forecast. It might be trying to collect revenues faster, thinking about ways to increase revenues to pay for fixed costs, or trying to determine what costs you might be able to cut. IMPORTANT: Creating and analyzing your cash flow isn’t a one-time exercise, to improve your cash flow in a long-term, meaningful way, you should be rolling your cash flow forecast forward routinely and be constantly reviewing the forecast and results.
3) Improve Cash Flow Related to Your Revenue/Sales and Accounts Receivable
There are many ways to improve cash flow related to your revenue/sales and accounts receivable. Here is a short list of the top ways to improve the collection time of your small business Revenue/Sales:
Automate Accounts Receivable Collection Efforts
If you use modern accounting software, make sure it is set up to automate collection efforts for you. These tools can send emails, texts, etc on your behalf on set schedules to prompt and remind your customers to pay you. These should be professional and there are best practices, see the link below for more details.
Prepare and Send Invoices Right Away
You are far more likely to collect your revenues quickly if you invoice for your products and services as quickly as possible. A delayed invoice by even a week will impact your collection efforts.
Make Payment Terms Clear, Reasonable and Known
Never assume your customers know that you expect to be paid within a certain time. You should ensure that payment terms are known before you start working with customers, plus, on your invoices, you should remind them of the terms. Also, make sure your payment terms are reasonable. Read more about this in the link below.
Make Payments Easy by Offering Enough Payment Options
If you don’t accept a variety of payment methods, you will be paid slower by your customers. Make sure you offer enough payment options so you can collect your receivables quickly. Read more about this in the link below.
Offer a Prepayment Discount
While you might not like the idea of giving a small discount, if you are struggling to collect your receivables, this might be the ticket to getting your customers to prioritize payments to you versus someone else who isn’t giving them a small discount.
Want more details on improving your accounts receivable collection? Check out our other blog:
4) Work to Review, Cut and Reduce Costs and Expenses
I think most small business owners are more than willing to review and cut business costs and expenses. However, many small business owners don’t know how best to go about it. Here’s a short list to help you systematically review, cut and reduce costs and expenses in your small business:
Perform a Key Vendor Review
Every business relies on certain key suppliers and vendors; however, small business owners rarely review these suppliers and vendors after they initially start using them. To help you review and reduce business costs, I recommend getting a list of all your suppliers/vendors including how much you spent with each of them over the past 6 to 12 months. This list will help you identify suppliers/vendors that are most significant to you and where you can stand to save the most money by potentially asking for better pricing or switching to providers. Check out the link below for more details on this process.
Inventory and Cancel Your Recurring Costs and Subscriptions
If you rely on recurring service subscriptions, I recommend you inventory all of those costs and check whether your small business really needs the service. Through this process, you may find some subscription tools and services that are underutilized or not utilized at all. Make sure you consider monthly charges as well as subscriptions that might only be paid once a year.
Get at Least 3 Quotes When Buying Materials, Supplies and Services
Don’t be lazy when it comes to getting the best prices for new materials, supplies or services. It’s always competitive out there so no matter what you are buying, make sure you are getting the best price-to-service ratio for your small business needs. Always trying to obtain at least 3 quotes before making a purchase decision will help you cut small business costs and will improve your cash flow.
Want more details on the best ways to cut and reduce business costs and expenses? Check out our other blog:
5) Talk with your Customers and Suppliers to Get in Front of Cash Flow Problems
Small business owners rely too heavily on emails, texts and assumptions. To help improve cash flow in your small business, try speaking to your customers and vendors by phone and be more proactive.
For example, if you have customers who are routinely slow to pay you, make sure you speak with them directly to understand what the issue could be. It might not be what you assume (they are short of funds), it could be that they aren’t overly happy with your products or services or the amount you are charging. Either way, it’s a win-win for you, you have the opportunity to potentially make a problem right, or in the case where the customer is struggling to pay you, you have the opportunity to be a little lenient and understanding, within reason of course. If you are professional in your collection efforts, you will likely get paid faster and you will hopefully be prioritized.
In the case of your suppliers/vendors, if your small business is struggling to pay invoices on time, the WORST thing you can do is ignore your suppliers and not communicate with them. Instead, be upfront about your cash flow issues, commit to keeping them informed, and when possible, pay them, even if not the full amount. If you have these conversations proactively over the phone, I think you stand a better chance for a little bit of payment leeway and flexibility, especially if you have been a good customer. Who knows, through these conversations, you might be able to secure better pricing or discounts as well. If you don’t ask, you don’t get! IMPORTANT: If you go the ignore/poor communication route with your suppliers/vendors when you are struggling, you can expect your supply to be cut off and your business will suffer.
6) Stretch Loan Repayments / Ask for New Terms / Skip a Payment
To help improve your small business cash flow, consider talking to your lenders and financers to see if they can offer you any flexibility on repayment or revised terms. If you don’t ask, you definitely don’t get! In your communication with them, be professional and straightforward. In addition, if you have a mortgage or term loan, ask about skip-a-payment options, these are pretty common and skipping a scheduled payment could be just what your small business needs to catch up on its cash flow.
7) Raise Prices / Work to Increase Sales - Spend More on Advertising & Marketing?
By far the best way to improve cash flow is to increase revenues. I get it though, this one might not be easy but it’s worth continually reviewing. To increase revenues, try looking for new sales or distribution channels that make sense, review your pricing (especially if you haven’t raised prices in a while), and consider spending more on advertising and marketing as long as there is a positive return on investment (ROI). Keeping a close eye on your competitors is critical because, during uncertain economic times, the natural reaction is to cut costs and survive, however, you might be better off trying to grow and gain market share as everyone else retreats. Something to think about: Search engine optimization (SEO) for your webpage to attract more customers might also be something to consider. Remember that SEO spending is longer lasting and potentially has a higher rate of return because showing higher in Google search could mean additional sales for an extended period of time whereas spending on ads only gets you customers so long as you as spending on the ads.
8) Sell/Refinance Equipment/Assets. Consider a Sale and Lease Back
If you have fully or mostly owned equipment or other assets, consider approaching a financing/leasing company or financial institution about refinancing or selling your equipment/assets and leasing them back. While this might not sound like a good option, this can be a really good way to secure a decent amount of upfront cash in exchange for loan repayments over time. The upfront cash can help you reduce other more expensive debt, help you execute on plans to increase sales, or allow you to pay down some critical accounts payable.
9) Consider Mortgaging Your Real-Estate
If your small business owns land or buildings and there is untapped equity in those holdings, consider getting a mortgage to help improve your small business's cash flow. The upfront cash you can get from this strategy can again be used to pay down more expensive debt, help you execute on plans to increase sales, or allow you to pay down some critical accounts payable.
10) Streamline your Inventory Levels and Management
It’s no secret that companies like Walmart became so successful because they were able to perfectly leverage and systemize “just in-time inventory” management. If you have extra stock lying around or you have more than a couple of months worth of product, you should be looking at ways to streamline and reduce your holding costs on inventory. This can be a lot of work and can be challenging, however, reducing your overall inventory level and management will help keep more cash in your bank account and will definitely help improve your small business cash flow.
11) Look for Process and Operational Changes/Efficiency + New Technology
You should always be evaluating processes and operations, however, if you are feeling a cash flow pinch, this should move up on your priority list. To improve cash flow for your small business, review all key functions of your business including:
1) Accounting, finance, and bookkeeping.
2) Sales, product, and revenue.
3) Customer service.
3) Marketing and advertising.
4) Human resources and payroll.
5) Production, manufacturing, and processing.
6) Executives and administration.
7) Information technology.
With a comprehensive review of your key business functions, including employees and implemented technology, you should be able to find efficiency and cost savings to help your cash flow. For example, in your accounting and finance department, you might determine that older software and lack of modern technology means a lot of tasks are done through manual efforts which wastes time and money, plus doesn’t result in you getting good information to help you manage and grow your business. In addition, as another example, by reviewing your production, manufacturing, and processing, you might determine that newer machines/equipment could help improve output while reducing your required labor force. Overall, something to keep in mind here, it’s business, people will understand things like layoffs and changes as long as they are done professionally and with good communication. You shouldn’t feel bad about making changes for the betterment/survival of your small business.
12) Seek Out Grants or Other Business Benefits and Programs
While the business grant scene is not nearly as lucrative as it once was with Covid, there are still meaningful grants out there to be had. For example, there are still hiring grants/wage subsidies out there for unemployed/underemployed people and students. You should know that finding grants, government programs, and business benefits doesn’t have to be a mystery or difficult. To check out most, if not all the bigger/best programs available in Canada, head over to the Government of Canada Business Benefit Finder. This tool asks you questions about what you’re looking for and what kind of business you have, and it tailors a list for you to review. Find the Government of Canada Business Benefit Finder here:
13) Get Help from a Professional like a Fractional CFO
Managing and growing a small business is not easy and you don’t have to do it alone. Instead of tackling everything yourself and to help improve your small business cash flow, consider hiring a fractional CFO to help you on a part-time basis. A fractional CFO should and will help you with everything I mentioned above and will also help tailor and identify more cash flow opportunities for your business specifically.