Robert Kiyosaki once said, "The number one word in the world of money is cash flow". However, many small business owners have trouble growing their business simply because they don't focus enough on cash flow. To position your business for growth you need to be able to convert sales to cash quickly and build a cash cushion by increasing the time between inflows and outflows. Here are some tips to help you improve the cash flow of your business:
- Collect payments consistently and often: Collecting payments more often and in smaller chunks ensures that there is always cash coming in. You never want your cash inflows to be stagnant. If you are making sales, but your customers are paying late, you can be left with a negative cash flow situation.
- Send out reminders: Automatic reminders are a great way to encourage prompt payment. Also, each reminder increases the likelihood of your customer paying you. Try to keep them personal, and don’t be afraid to send multiple reminders – you need your money!
- Penalize late payments: Issuing penalties for late payments creates further incentive for customers to pay up in a timely fashion. This approach also provides you with a little extra cash for the trouble of waiting for their payment.
- Reward early payments: A great way to entice slow payers is to offer rewards or discounts if they pay early. This often leaves both parties happy since you will have your money and your customer will feel as if they got a deal.
- Pay your bills strategically: If you know you’ll be strapped for cash until next month, a good move may be to delay paying certain expenses until you have sufficient funds. Be strategic about which payments to push back though – some will have more flexible deadlines than others.
- Avoid penalties: Just as you may impose late fees on your customers, your suppliers may do the same to you. Pay in a timely manner to avoid these, and keep as much money as possible in your small business.
- Review fixed costs: Keep track of your small business’s fixed costs, such as rent and employee salaries. These will generally stay the same from month to month and understanding them is an important step toward being able to handle the expenses on a regular basis.
- Manage inventory: Inventory can be expensive, and if you have bills that need to be paid in order to keep your small business afloat then you have to be careful not to let too much cash get tied up in your inventory. Make sure to order only what you need so you are able to handle your other expenses.
Long Term Improvements
- Forecast cash flow: A cash flow analysis will help you identify areas of improvement and estimate the cash you’ll have on hand in the future so you can plan accordingly. To perform a successful analysis, you will need good financial records and should get help from a bookkeeper or accountant.
- Begin driving your costs down: Negotiating with suppliers to bring down the cost of inventory, equipment, or services is an important strategy that is often forgotten. With small incremental improvements, your savings will add up over time and help your cash flow.
Making improvements to your cash flow can take time, but with these simple steps you can start improving today! You’ll be glad you did. With strong cash flow you can have the financial position and peace of mind to take your business to the next level.