How to Improve Cash Flow for Small Business: Expert Guide

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Don’t let cash flow issues come in the way of your success! Learn the strategies to improve cash flow through our expert guide and take charge of your small business's financial performance.

Managing cash flow is essential, as it is the lifeblood of any small business. It is one of the ways to gauge how much money is coming in and leaving the doors of the business. 

As per the research conducted by U.S. Bank and published on the SCORE/Counselors to America’s Small Business website, cash flow problems are by far the most common cause of failure for small businesses. 82% of small businesses fail due to a lack of knowledge of cash flow and inadequate cash flow management skills.

Therefore, it is crucial for small business owners to comprehend ways and learn how to improve cash flow for small business

The major reasons for cash flow issues will be discussed in this blog article, along with practical solutions for improving cash flow. 

If this is something that interests you, keep reading to learn more.

Cash Flow: Definition

The net amount of cash and cash equivalents coming into and leaving a business is known as cash flow. Money spent symbolizes cash outflows, whereas money received indicates cash inflows.

The capacity of a business to generate positive cash flow during the regular course of its business activities determines its success.

The Importance of Cash Flow for Small Businesses

The importance of cash flow for small businesses

Here are some essential pointers on why is cash flow important for small businesses:

  • Clear picture of business performance: A cash flow statement provides a clear picture of the money that is really entering and leaving a business. It also determines if the amount of money earned exceeds the amount of money spent.
  • Represents stability: A positive cash flow means a solid business structure. It enables you to make on-time payments to suppliers and fulfill other financial obligations. You will also be able to avoid penalties and fines for late payments which will portray a positive business image.
  • Opportunity for growth: It becomes much easier to achieve growth and avoid high-interest loans if you have cash on hand to dedicate to development and expansion activities.
  • Better decision-making: With an accurate cash flow statement in hand, you’ll be able to make quick decisions and plan your future operations accordingly. 

Common Cash Flow Problems Faced by Small Businesses

  • An unrealistic cash flow forecast and a lack of cash reserves can result in the failure of your business due to negative cash flow.
  • Not preparing a proper cash flow budget will keep you from estimating the amount of money you anticipate spending and receiving over a specific time period.
  • Ignoring excessive overhead expenses can rapidly eat up your revenues.
  • Slow collection of receivables may hinder growth and prevent you from having the funds necessary to carry out regular business operations.
  • Setting low-profit margins can result in a never-ending battle with cash flows.
  • High-interest business credit cards and business loans may consume a significant portion of a company’s cash flow.
  • Overinvesting in inventory and having sales that don’t make up for the lost money can leave the businesses in a bind.
  • Not taking seasonal fluctuations in demand into consideration might negatively impact cash flow conditions.

Ways to Improve Cash Flow for Small Businesses

1. Prepare for future cash requirements

You may make a projection for your business on the basis of past performance if you maintain accurate, timely, and appropriate financial records in accounting software. Business owners should be analyzing their business’s cash flow on a regular basis.

Being upfront with your cash flow allows you to foresee the income you expect to have and aids in planning for difficult times or seasonal trends.

2. Maintain cash reserves

Keeping a cash reserve is the easiest approach to prevent running out of money. You won’t run out of funds if you have three months’ worth of expenses on hand for when an opportunity or unanticipated crisis comes. Be sure to manage your reserves in a systematic manner. Restock the reserve once you’ve used some of it.

To avoid running out of cash, you may also utilize a business credit card or get a line of credit. 

3. Ramp up your receivables

You could manage your accounts receivable more actively by keeping track of unpaid bills and shortening the time it takes for payments to be received.

Encouraging clients to make early payments is one approach to achieving this. But how can you do so?

Let’s see how.

  • Send an invoice as soon as a sale is made to prevent late payments. Change your billing schedule from monthly to one where you send invoices as soon as a particular amount of work is finished. 
  • Consider switching to e-invoicing, using a cloud-based estimating & invoicing software, like InvoiceOwl. This will help you to promptly create and send invoices to clients via email. InvoiceOwl even allows tracking payments in real-time.
  • To improve cash flow management procedure, use a “net 30” payment schedule that mandates that clients pay their invoices within 30 days of receipt.
  • If your payment schedule is net 30, think about providing a little discount to clients who pay within 10 days.
  • It will be much more feasible for a consumer to pay you if you provide a range of payment options, such as ACH or credit card payments.
  • For big or special orders, ask for a deposit.
  • Follow up on unpaid invoices and debts on a regular basis.
  • Introduce a late payment penalty.
  • Two excellent options for receiving advance payments on receivables are invoice factoring and invoice financing. It might assist your business in receiving the funds due before a customer is ready to pay.

Don’t Let Late Payments Hold You Back!

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4. Optimize your payables procedure

Improving your company’s cash flow will depend on how well your accounts payable procedure is established and managed.

  • You are under no need to pay in full at once, and you really shouldn’t. This is not to mean that you should let any payments fall behind. Rather, to make sure you have enough cash on hand, think about categorizing your invoices into three groups:
    • Category 1: Mandatory payments- Payroll, taxes, and rent fall under the first category of obligations that must be met in order to maintain business operations.
    • Category 2: Essential payments- When there are grace periods without penalties for utility and insurance payments, you could leverage that in your favor.
    • Category 3: Flexible payments- A lot of suppliers and vendors are open to negotiating a flexible payment schedule. Maintain open lines of contact, be truthful with them, and make your payments on schedule.
  • Determining how late you may pay your vendors without incurring late penalties or jeopardizing your relationship is important.
  • Most suppliers will want a net 30 payment schedule from businesses, but when you establish a good rapport, they can be more willing to provide a net 45 or net 60.
  • As you select your checking, savings, and credit card accounts, consider searching for lower interest rates.
  • Instead of attempting to pay off low-interest loans right away, think about making minimal payments on them. Because you eventually pay off loans with money that is less valuable than it is now, inflation might work in the borrower’s favor.

5. Better manage your inventories

Better manage your inventories

  • Check your inventory to have a clear picture of what products are lying in your stock.
  • Analyze and identify those products in your inventory that are not doing well in the market. Such products can tie up a significant amount of cash and can result in negative cash flow.
  • Get rid of what isn’t selling rather than purchasing more of it, even if you have to sell it at a discounted price.
  • To the extent it’s feasible, locking in pricing in advance can help in inventory management. Even now, many small business owners buy in advance to prevent the impact of inflation.
  • If you want to have more purchasing power, you have the option to join a purchasing group.
  • You can even utilize shared warehouses to keep merchandise near international suppliers.

6. Don’t buy it, lease it

Although it is often less expensive in the long run, purchasing new equipment and upgrading obsolete technology might be expensive in the short term. Your immediate financial strain may be reduced by leasing equipment instead. 

Equipment leases usually qualify for tax credits that reduce your tax liability, saving you the hassle of having to replace or try to sell out-of-date equipment that you’ve already bought. As a result, you’ll have a more consistent, healthy cash flow and make fewer significant cash withdrawals from your bank.

7. Raising the prices

The idea of raising prices terrifies a lot of business owners. They are concerned that it will result in lower sales. To locate the sweet spot, though, pricing experimentation feels right. How high are buyers ready to pay? Without taking a chance, there is no way to find out.

Frequently Asked Questions
  1. How can I determine cash flow issues in my small business?

    Here’s how you can determine cash flow issues:

    • A cash flow statement analysis might help you find issues with your cash flow.
    • Watch out for warning signs including a persistently negative cash flow, problems making bill payments on time, and difficulty attracting new clients.
    • Additionally, inefficient billing and invoicing procedures, a lack of cash reserves, and excessive expenditures are typical causes of cash flow issues.

  2. How can invoicing software help small businesses with cash flow?

    By streamlining the billing and invoicing process, invoicing may assist increase cash flow for small businesses by generating e-invoices quickly, making it simpler to track payments and take action on late payments.

    Furthermore, certain invoicing software, like InvoiceOwl, enables small business owners to offer multiple online payment options to clients to get payments quickly.

Stop Chasing Payments!

Using InvoiceOwl, easily create invoices, email them to clients, and track payments to increase cash flow.

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In conclusion, a small business’s ability to maintain a positive cash flow is essential. As discussed in the blog, small businesses can manage their cash flow and safeguard their financial future by comprehending the typical causes of cash flow issues and putting into practice efficient techniques to increase cash flow. 

Effective management of the invoicing and billing processes is one of the important components of enhancing cash flow. The procedure may be streamlined and automated with the aid of estimating & invoicing software, like InvoiceOwl, which also makes it simpler to keep track of payments and follow up on delayed ones. Small companies may find it to be a useful software for enhancing the overall company’s health and cash flow.

Author Bio
Jeel Patel
Jeel Patel

Jeel Patel is the founder of InvoiceOwl, a top-rated estimating and invoicing software that simplifies the invoicing and estimating processes for contractor businesses. Jeel holds a degree in Business Administration and Management from the University of Toronto, which has provided him with a strong foundation in business principles and practices. With understanding of the challenges faced by contractors, he conducted extensive research and developed a tool to streamline the invoicing and estimating processes for contractors. Read More

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