Cash is a business necessity–the lifeblood of any enterprise. Despite its function and importance, cash flow management remains largely misunderstood by most entrepreneurs. This article will take you through the steps to implement effective cash flow management for your company and improve it in three areas: efficiency, profitability, and customer retention..
The “5 ways to improve your cash flow” is a helpful article that goes over 5 ways you can improve your cash flow. These include things such as increasing your sales, decreasing expenses, and more.
Maintaining the health of your company requires keeping an eye on your cash flow. You’re at danger of suffering debilitating cash flow issues if you don’t have positive cash flow, or actual cash coming into your company on a regular basis. In fact, inadequate cash flow is a major reason why one out of every four companies fails in the first year, and more than half fail by the fifth year.
Even if your company seems to be successful, cash flow issues may arise. However, bear in mind that cash and earnings are not synonymous. You won’t be able to pay your bills until your customers pay their invoices. So, even if you’re conducting a lot of business, if your clients are reluctant to pay, you may still be having cash flow issues.
Cost-cutting initiatives such as reviewing vendor pricing, reducing unnecessary expenditures, and investing in time-saving technologies are likely to be revisited on a monthly, quarterly, and yearly basis. But what happens if it isn’t sufficient?
Fortunately, if you’re having trouble maintaining cash flow and need to make changes right now, there are a few tried-and-true techniques you can start using right now. Here are some suggestions to help you increase your cash flow.
1. Have a decent library.
Examining and cleaning up your financial accounts is a straightforward approach to increase cash flow. If you don’t keep precise track of your money, you won’t be able to figure out where it goes. It’s critical that you have a solid grasp of the following measures’ current state:
Keeping them up to date is your first responsibility, and it may help you discover areas where you can improve. If you’re having trouble keeping track of your finances, a decent accounting software program like Freshbooks, Quickbooks, or Xero may assist you. Some cloud accounting systems automate invoicing and flag late and unpaid bills, making it simple to remain organized.
2. Prepare a cash flow projection and stick to it.
It’s clear how this can be used to manage cash flow. But what’s less apparent, and maybe even more essential, is that it aids in the identification of changes. Regularly monitoring your cash flow and comparing the actual results to your predictions may be very beneficial.
Changes are much more significant than gross values. If you’ve been doing business with 50% of your sales on credit for years and then it suddenly drops to 70% or 30%, that’s a warning sign. You utilize the prediction and actual data to identify major patterns early and make appropriate changes.
A solid cash flow forecast identifies the main cash flow drivers in your company. That may be sales, accounts receivable, accounts payable, inventory, or something else entirely. This is why it’s critical that your books are up to date and that you’re keeping track of everything.
When you compare out-of-date predictions to inaccurate actuals, you’ll get a skewed picture, so be sure to maintain these financial documents updated and revisited on a frequent basis.
3. Keep an eye on your receivables.
On your balance sheet, accounts receivable is shown as a “current asset.” However, you may observe month-to-month fluctuations in accounts receivable on your cash flow statement.
Reviewing your financial accounts on a monthly basis is an important part of keeping on top of your company’s success. You’re looking for worrisome patterns in accounts receivable, such as your AR increasing over time, since it means you haven’t been paid on pending bills.
Businesses who make a lot of sales but aren’t paid on time (or at all) are in danger. You may have a lot of income on paper, but you won’t be able to pay your expenses until you have cash on hand. Here are some pointers for getting more consistent outcomes when billing customers.
Make your payment terms explicit.
Set explicit payment conditions in writing when submitting a project proposal or contract to prevent cash flow issues. When issuing an invoice, make sure to lay out the payment conditions once again. Reminding your clients and yourself on a regular basis keeps you both responsible and ensures that there are no misunderstandings about payment expectations.
When billing, avoid using complicated accounting terminology.
According to FreshBooks research, using the phrase “21 days” rather than “Net 21” in your payment conditions increases the frequency and speed with which invoices are paid. While most company owners understand the meaning of phrases like “Net 21 days” or equivalent, less business-savvy customers or consumers may not.
The same study discovered that being courteous is important. A simple “please pay your invoice within” or “thank you for your business” may boost invoice payment rates by more than 5%.
Test terms and conditions on a regular basis.
To optimize their own cash flow, large companies fine-tune their accounts receivable procedures. That is, they test various keywords depending on their customers’ requirements on a regular basis and replace those that don’t perform well.
If you believe this type of testing can help your cash flow, consider putting new conditions in place for a certain length of time and tracking the outcomes. It’s worth maintaining the modifications in terms if they help you receive your money faster. If it doesn’t work, try again. For additional information, see this article, which discusses a variety of strategies for being paid quicker.
4. Reduce the amount of money owed to you in accounts payable.
Keep an eye out for rises in accounts payable: your bills, while examining your cash flow statement. An rise from month to month or year to year may not indicate a serious issue. However, if you know your accounts payable are rising and you don’t have enough cash in the bank to pay those rising invoices, it’s important to devise a plan to address the issue before it causes your company to collapse.
Rather than reducing the time it takes for consumers to pay you, you want to discover methods to extend the accounts payable timeframe and retain money in the bank.
Make a plan to pay your payments the day before they’re due. Professional groups, such as utilities and credit card firms, anticipate this. This is one strategy for slowing the flow of cash out of your company.
Your aim is to be paid as soon as feasible and keep your money for as long as possible without jeopardizing your credit or reputation. Don’t attempt to avoid paying your expenses; just don’t pay them a month early if you don’t have to.
Accounts Payable Discounts
You should also keep an eye out for savings if you pay on time. While it’s a good rule of thumb to defer payments as long as possible, you may discover that paying on time or early gets you significant savings. If you intend on paying bills more promptly, weigh the possible cost savings and make sure you have adequate money in the bank.
5. Keep inventories under strict control.
There are advantages and disadvantages to holding large quantities of onsite inventory, similar to the balancing task of handling accounts payable. With bigger purchases, you may be able to take advantage of volume discounts, but it simply means less money in the bank if you can’t sell it.
Examine your existing inventory and make a note of any products that aren’t selling as quickly as others. Rather of purchasing more, attempt to sell what you already have and either remove it from your sales funnel or reduce the quantity you acquire.
If you decide not to purchase more of a certain item, attempt to get rid of your existing stock. Sell it at a lower price, package it with other successful sales products, or give it to get a tax deduction. Whatever you do, attempt to get rid of slow-moving goods and collect as much money as you can.
After that, carefully monitor any future purchases and consider the expense of taking advantage of bulk discounts.
6. Send bills out as soon as possible.
It’s fairly unusual for companies to charge their clients all at once at the end of the month. However, common logic dictates that the longer you delay to send out bills, the longer it will take to collect.
If you’re experiencing trouble with cash flow, you may want to try speeding up your billing process. It’s possible that bills will be sent out as soon as tasks are completed and items are delivered. As a result, your customers will get their bills sooner, which means you will be paid sooner.
Keep in mind that timely payment discounts will very certainly be required as part of this procedure. If your customers are also company owners, they’re probably going through the same process of extending their accounts payable as far as they can, and they’ll need a reason to pay sooner.
7. Understand when to lease and when to purchase.
To function, almost all companies need equipment, facilities, and real estate; whether they should purchase or lease these things is a different issue.
If your company is short on funds, leasing equipment and renting retail or office space may be a better option than purchasing it altogether. You won’t have to tie up large amounts of your money in order to gain access to the materials and places your company need to be successful if you opt to lease such things. To put it another way, your company will be better prepared to react to new possibilities and overcome unexpected difficulties.
Once you’ve resolved your cash flow issues, it’s time to consider if longer-term agreements are possible. When you own your property, your company will effectively be paying you (or, more precisely, your LLC) rent—and there are additional tax advantages to consider.
When your company can effectively control the cost, make long-term investments and acquisitions. The fact that you “possess” a piece of equipment or office space is no longer an asset if you’re losing money and can’t increase your cash flow. Plan ahead of time and thoroughly consider what the best moment is to go from renting to owning.
8. Create fresh marketing initiatives in order to increase sales.
If your sales are stagnating—or even if they aren’t—you should consider retooling your marketing efforts from time to time. Look no farther than Coca-“Share Cola’s a Coke” campaign, which was credited with a two-percent increase in sales for the beverage giant in 2014.
What’s the greatest part? Coke didn’t have to do much to create these additional sales; the whole campaign consisted of just printing names on bottles and cans, with the notion that consumers would purchase bottles and cans with their names, as well as the names of their friends, colleagues, and loved ones.
They were able to increase sales from current clients, which was a far more cost-effective strategy than chasing a new market. Focus on boosting dollars per customer from your current target market while adjusting your marketing efforts.
You probably won’t even need to create a new campaign for this. Instead, experiment with special offers and discounts, establish a membership club to reward loyalty, or come up with innovative methods to showcase what your consumers like about your company. Throughout this process, strive to enhance your return on investment (ROI) by incurring less marketing expenses per unit of increased sales.
9. Open a savings account for your company.
With a high-interest savings account, you can make your money work for you. This may seem to be a no-brainer, but investigating alternative ways to stash your cash may be essential. Look for choices with interest rates that are greater than the norm.
The more extra liquidity you generate, the higher the rate and the more you enhance your financial position via other cash flow improvements. It’s a simple technique that needs minimal maintenance and just raises your profits without you having to do anything.
10. Increase the cost of goods and services.
When was the last time you increased your company’s prices?
It may be time to increase pricing if you’ve been struggling to sustain cash flow and haven’t done so in a while.
However, don’t raise them all at once; you don’t want to alienate your regular consumers. Instead, you’ll be able to earn more revenue—and perhaps even more sales—while padding your bottom line by properly planning and promoting price increases.
You may use a number of strategies to minimize the chance that your consumers will get enraged when your company increases its pricing. To begin, don’t raise your rates until you’re certain that your clients are completely pleased. You may also attempt to schedule your pricing hikes to coincide with product upgrades.
A software-as-a-service (SaaS) business, for example, could consider raising membership prices following a significant update and the addition of new features. Furthermore, your company might bundle its services for a cheaper average cost (much as cable providers do), incentivizing consumers to purchase more than they would otherwise.
You may now establish legacy pricing even if your price hikes are well-planned and you’re still worried about losing consumers. Instead of quickly altering price for existing clients, grandfather them into the old model for a while and only utilize the new pricing model for new customers. While this approach prevents you from losing all of your money, it does allow you to lose out on a possible inflow of income flow.
Keep your financial flow in check.
You must sustain your cash flow after you have begun to improve it. Actively predicting your cash situation and reviewing your cash flow statements on a frequent basis is one of the easiest methods to accomplish this.
If you need assistance arranging your current cash flow statements and projections, you may use our free cash flow statement or use LivePlan to partly automate the process. You can rapidly assess the health of your company and make correct choices to enhance your cash flow with step-by-step coaching, accurate forecasts, and the option to seamlessly sync with your accounting software.
Whatever method you select, make it a practice to review your cash flow projections and compare them to your current financial accounts on a regular basis. It may assist you in identifying possible cash flow issues before they occur and guarantees that you are constantly up to date on the status of your company.
The “7 ways to improve your cash flow” is a list of some tips and tricks that can help you to improve your cash flow.
Frequently Asked Questions
How do you fix a cash flow problem?
A: The first step is to understand why you have a cash flow problem. This can be due to the following reasons, but are not limited to these: your business lost money in previous years, profits from sales were lower than expected this year or expenses increased at an unexpected rate which put pressure on cash flows for the company. If its purely about profit and loss then one of the best ways would be raising prices as that will increase revenue thus increasing income while simultaneously reducing costs by lowering input prices such as raw materials and labor rates. Another option could be working with suppliers so they agree to provide more goods without putting additional strain on your budget (e.g., getting them to reduce their price).
What are two ways to improve cash flow?
A: There are many ways you can improve your cash flow. Some methods include increasing the number of customers to generate more business, and also finding new sources for making money such as by selling a product or service thats complementary with what you already do.
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