Before you implement growth strategy, get a handle on your cash flow. If need be, improve it by following some of these eight tips.
How you manage cash flow is one of the most important factors to the growth and wealth of your business. After all, the cash that comes in and out of your company is directly related to its profitability and your business’ success.
However, as most business owners know, improving cash flow can be easier said than done. For example, expenses go up when you’re hiring more employees or expanding locations, which affects the movement and timing of cash flow.
As you may have gathered, any misdirection or delay in account receivables and payables could seriously jeopardize growth.
That’s why the importance of managing cash flow efficiently can’t be stressed enough. A strategic approach to your liquidity can stabilize revenue, improve financial forecasting, and business credit. So what can you do to improve cash flow? As we’ve worked with clients over the years, we’ve seen these eight strategies perform especially effectively. One or more might be right for you, but consider your business and its unique needs carefully.
1. Sign contracts faster – Business owners know when they sign a contract, they can start collecting payment. Well, they also know the faster the contract gets signed, the faster payment comes in. It also means both parties have agreed to certain payment terms, including late payment penalties, all of which will affect cash flow. Don’t forget to add incentives to pay early, like giving a small 10% discount for an early payment. It may be more valuable to have cash faster than losing that 10%.
2. Apply for a line of credit during solvent times – The right time to apply for a credit line with your bank is when you don’t need it. It’s true, banks approve credit lines when business is good. It’s also great to have cash readily accessible when you need it most. Additionally, by drawing on credit and paying it back quickly during stable times, you establish a good relationship and credit history with your bank.
3. Forecast with accuracy – In order to ensure you have accurate cash flow, you need to predict what cash might (or might not) be coming in. Estimating the amount of cash flow your business will generate over a future period can be difficult. If you’re an established company it can be a bit easier since you can look at the last income statement with revenue and operating profit and costs, as well as current market and economic conditions. However, if you’re a starter company, it can be a little more difficult. You can use market research and industry trends to predict future cash flow.
4. Adjust your pricing, if feasible – Pricing strategy is important since it can affect your cash flow immensely. Be aware of the value of services or products you provide, the cost to deliver, and what the competition is charging. If you haven’t raised prices in a while, this may be a good option for you. Just raising prices 10% could make a huge difference in your cash flow, while only seeming like small increase to your customer base.
5. Evaluate customer terms vs. supplier terms – To ensure cash flow is steady, make sure your payment terms coincide with supplier terms. If you’re not sure, start by looking at how well your customers are meeting your terms and how well you’re meeting your supplier’s terms. Also, compare industry standard terms against your own and your supplier’s and check if there are any discounts offered for paying your supplier earlier.
6. Examine your invoicing system – Shorten collection time on accounts receivable by having the right invoicing system in place so you get paid on time. Some important yet simple ways to improve are to invoice on a consistent basis, give customers plenty of payment options, and send invoices to the right person. While it seems obvious, you’d be surprised by how many invoices just sit on a desk or land in the wrong person’s inbox. Directing it to the appropriate person for approval will expedite payment.
7. Keep vendors and suppliers informed – Informing vendors and supplies when their payments will be late isn’t just good for business relations; it may allow you the extra wiggle room you need to bridge the gap between money coming in and out. For example, if you can’t pay your vendor until a customer pays you for the product first, tell the vendor the predicament you are in. The vendor may be willing to work with you by offering a partial payment option or give you the extra days you need.
8. Tell your employees that improving cash flow is a priority – First, make sure they know why it’s a priority. Your employees are dealing with the day-to-day interactions and most likely have a good relationship with customers. This puts them in the best position to inquire about late payments and receive customer feedback when invoices are wrong. Together, you and your team can make big improvements to cash flow.
Lack of cash is a big obstacle business owners face during growth. Follow some of these tips to help manage your cash flow better, more efficiently, so it will create more opportunity to grow and increase your company’s profitability.
Verity Commercial often advises business owners on their cash flow as it relates to investing in commercial real estate and getting funds needed to expand space or locations during growth periods. Before you include expanding space or locations as part of your growth strategy, think about consulting with us for advice. We can help you decide the best way to approach commercial real estate so that it aligns with improved cash flow.