5 Ways to Improve Business Cash Flow

Updated: December 16, 2022

Many problems for small businesses and startup owners relate to business cash flow. In fact, 82% of small businesses fail due to cash flow problems.

Having positive cash flow is so critical for businesses that they can be doing everything right, but unless this one financial metric is where it needs to be, it can still fail.

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
• Having to open lines of credit to fulfill operating expenses

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. In this scenario, there is a cash flow timing issue. Where on paper, you have all the money to cover your expenses, but it is not accessible for you at the moment you need it.

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 profits or, in the worst case, your personal funds to pay your bills.

Two Types of Businesses Struggle with Cash Flow Problems

A healthy cash flow is a critical financial metric for every business. But there are two types of businesses that commonly struggle with cash flow problems because of how their business is structured.

• Service-based businesses: business structure bills 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 negative cash flow. This can create problems until the company is able to build up enough of a cash reserve that can allow them to cover their business expenses when they have unpaid invoices. A further problem can arise from late payments, which smaller businesses are particularly vulnerable to.
• Businesses with inventory: such as e-commerce, direct-to-consumer, and retail business. These businesses need to buy and hold inventory in advance in order to be able to fulfill orders. Their inventory is often purchased with cash or credit. These businesses don’t receive money for that inventory until it is sold. Holding inventory is unavoidable, as it is the nature of the business.  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 or Advance

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 remaining balance of the service when it’s completed. Instead of billing in full when the work is complete, a deposit will allow you to have some 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! If you spin it correctly, it can be a way of offering more favorable payment terms to your clients.

Keep in mind that how much of an impact this strategy makes on your cash inflow will depend on the profit margin from your services. Also, it may not be a fit for your industry or for your client base.  Even if it doesn’t completely solve the problem, it can certainly help mitigate your poor cash flow situation.

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 invoice reminders for your clients, so payments don’t get missed. Some clients have strict deadlines to deliver invoices. For this reason, it’s essential to always stay on top of your invoicing schedule.

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, Xero, or whatever accounting software you use to invoice for you, or outsource your accounts receivable 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.

Following this strategy may completely change how you structure your work. But if you have cash flow problems consistently, then this may be the restructuring that your business needs.

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 the invoice.  This can mean automatic withdrawals from their bank account or their preferred business credit card.

While making it easy to pay is important, also be upfront about late payment fees. If you do decide to include penalties, then make sure you discuss this upfront and have it clearly stated in your service agreement contract.

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 business owners 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

A positive cash balance is a necessity for every profitable business. Without it, you cannot pay your bills or grow your business.

Outsourced bookkeeping can help with cash flow management and cash flow forecast 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.