Common cash flow problems include:
- Not having enough cash in your bank account to pay bills or cover costs in an emergency
- Your expenses exceeding your cash at any time
- A mismatch in the timing of bill payments and payment collection from clients
As an example, Take a service-based business, such as a law firm:
On January 1st multiple bills, such as rent, subscriptions, and payroll, are due. But you still haven’t received payment from your clients, which is due January 31st.
In this example, there is a mismatch between when you get paid by your clients and when you have to pay for your bills, there is a cash flow timing issue.
You need to find a solution for this cash flow timing issue; otherwise, you’ll be in a dilemma or you’ll have to use your personal funds to pay for your bills.
Two Types of Businesses Struggle with Cash Flow Problems
There are two types of businesses that commonly struggle with cash flow problems because of how their business is structured.
- Service-based businesses bill clients in the future for work they are doing now. They may do the work today and not bill clients for 30 to 90 days, which creates a cash flow crunch. This can create problems until the company is able to build up a cash flow buffer.
- Businesses with inventory such as e-commerce, direct-to-consumer, and retail, buy and hold inventory in advance purchased with cash or credit. These businesses don’t receive money for that inventory until it is sold. Holding inventory is unavoidable but holding too much or not turning that inventory over quickly ties up cash that needs to be available to pay for expenses.
5 Ways to Improve Business Cash Flow
1. Ask for a Deposit
A deposit is a down payment on goods or services. When you ask for a deposit, it’s an agreement that the customer will pay the total price of the service when it’s completed. Instead of billing in full when the work is complete, a deposit will allow you to have funds to pay your bills.
Offering a discount for paying early is another way to make it easy to receive payment upfront, and everyone loves an incentive!
2. Send Your Invoices Quickly
This is one of the easiest ways to improve cash flow. In theory, when you send your invoices quickly, you’ll get paid sooner. You can also set up automated payment reminders for your clients, so payments don’t get missed.
On your invoices, be sure to show the amount and the payment terms as well as clear instructions on how to pay so the client knows exactly what to do.
Use QBO or Xero to invoice for you, or outsource your A/R completely (Vertical CPA can help with this)!
3. Bill Frequently
Billing frequently is a technique that can help you improve your cash flow. It involves billing your clients regularly instead of at the end of a long project. Or try setting specific milestones and bill once each milestone is reached.
A good example of this is fixed pricing where clients are billed on a monthly basis (if this suits your business), rather than hourly. This also saves time figuring out what to bill each time and allows the client to know exactly what they’ll pay each month.
4. Make it Easy to Pay
There are several ways to make it easy for your customers to pay you. One of them is to offer your clients multiple ways to pay whether that’s automatic withdrawals from their bank account or their preferred credit card.
While making it easy to pay, it’s important to also be upfront about penalties for paying late.
5. Credit Line
If the options 1 to 4 above aren’t helping, credit lines are a way to access money without borrowing long-term.
You can go to a bank or other lending institution to get a credit line, and they allow the person borrowing the money to use funds when needed as a flexible loan.
The borrower can draw only what he/she needs up to a specific limit on the credit line, pay it back, and take out more, as a revolving credit.
Outsourced Accounting Can Help
Cash flow is a necessity of any business. Without it, you cannot pay your bills or grow your business.
Outsourced bookkeeping can help with cash flow management by providing insight into how much money is coming in and going out of your company. It can also help you understand the state of your company’s balance sheet, which will help you make better decisions about where to invest and how much to borrow.
Take a proactive approach to better your cash flow by contacting Vertical CPA today.