Improving Cash Flow in Your Small Business
Revenue and profit mean two different things. Revenue represents how much money your business earns from sales while profit is what you’re left with after all expenses. How different is your revenue from your profit? A large gap between the two can indicate unnecessary spending and highlight growing cash flow concerns.
Cash flow measures the transactions flowing through your bank accounts. Improving cash flow in your small business should be apriority not only to enjoy additional income in your bank account at the end of the year, but to also give your business the best chance of scalability.
Negotiate Payment Terms
The first way to improve cash flow in your business is to negotiate payment terms. Just like you, vendors want to receive their payments as quickly as possible. This means that they may offer incentives, like early payment discounts, to speed up collection times. Although the 1% or2% may seem immaterial, this discount can add up on large orders.
A 1% discount on a $10,000 order comes out to $100. If you don’t find any current discounts offered, reach out to negotiate more favorable terms. This might include a bulk order discount or an extended invoice date.
Implement Incentives for Customers
Likewise, you should be implementing incentives for customers. The quicker you can collect receivables, the stronger your cash flow will be. Offer customers early payment discounts for amounts remitted in the first week of the invoice date. The small fee can save you hours of collection work.
Other incentive strategies should be considered as well. Do you offer customers a bulk order discount? How about incentives to pick up their own packages? Finding creative ways to promote sales will increase your revenue stream and help pad up your checking account.
Create a Budget
A budget is a beneficial tool when it comes to evaluating the cash flow of your small business. How much are you spending compared to what you are saving? Do you know exactly where your money is being spent? A budget looks to add clarity throughout business operations by highlighting areas of high spending.
You may find that you are overpaying for supplier orders or have subscriptions that can be canceled. To generate a budget, printout financial statements for the last period, which is usually a month. Then, highlight areas you want to reduce costs. A budget is only effective if you consistently review progress, making it important to check transactions on a weekly basis and implement adjustments.
Look Into Factoring
Accounts receivable factoring can be a great way to receive earned money sooner, boosting cash flow. Accounts receivable factoring is passing the collection burden off to a third party in exchange for a fee. The third party will pay you the balance of the collectibles minus a certain fee, allowing your business to enjoy a lump sum of cash flow rather than have money trickle in. Accounts receivable factoring can also reduce your business’s risk of uncollectible amounts.
Reduce Unnecessary Expenses
Expenses are subtracted from revenue to generate profit. This means that by reducing your expenses, you are able to increase profitability and cash flow. To reduce expenses, you will first need to understand your income statement and current expenses. Pick one or two categories that you want to focus on for a month. Taking on an unreasonable goal can lead to failure. Additionally, pick categories that can easily be altered, such as advertising. You don’t want to choose fixed costs that are difficult to change.
Consider Leasing Equipment
Leasing versus buying equipment is a decision that business owners will need to make. Buying equipment leads to a larger up front cost with the burden of any repairs falling on you. On the other hand, leasing comes with lower payments, but your business might also be subject to interest. Start by understanding the balance sheet and your working capital, which is your current liabilities minus your current assets.
If you notice your working capital isn’t favorable, consider leasing equipment. However, if you have a large amount of cash on hand to fund the purchase, you may want to buy the equipment. There are other options when it comes to purchasing equipment, such as leveraging lines of credit and equipment loans. Both of these options come with interest and principal payments, but it can be a great solution if you are temporarily low on cash.
Understand Cash Flow Patterns
Improving the cash flow in your small business relies on comprehending the health of your cash flow. Determining your cash flow health can be done by evaluating investor and loan funding along with current growth and profitability. Once you understand what’s currently happening, you can implement a strategic plan to improve cashflow.
Consistently Review Reports
Reports provide valuable insight into operations. The basic financial statement package includes the income statement, balance sheet, and statement of cash flows. Each of these statements tells you different information on the profitability, scalability, and liquidity of your business. You should review your financial statements on a regular basis to make informed business decisions. For example, reviewing the accounts receivable aging schedule monthly allows you to see which customers you need to follow up with on payments.
Complete Bank Reconciliation
Regular bank reconciliations might be a procedure you already have worked into your accounting processes. Bank reconciliations match what cleared the bank to your accounting records. Forgoing this reconciliation leads to an inaccurate cash balance in your accounting system, which can impact your cash flow decisions. If you don’t already have reconciliation in your regular procedures, consider adding them to see improvements in your cash flow.
Finding the right cash flow strategies should be a top priority for a business owner. Not only can strong cash flow give you the tools to scale your business, but can also improve transparency throughout operations.
Working with an expert, like Bookkeepme can help you uncover the cash flow strategies that are best for your business. Reach out today to learn more.