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Ten Ways to Improve Small Business Cash Flow

Written by Live Oak Bank

Ten Ways to Improve Small Business Cash Flow

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Simply put, cash flow is defined as the incoming and outgoing funds of your small business. Improving your cash flow ensures that you’ll have enough money to pay bills and grow your business — it’s an overall indicator of the health of your business. However, managing cash flow remains a consistent challenge for small business owners. In fact, 60% of small business owners say cash flow has been a problem at some point in the history of their company. This can have widespread negative consequences, including missed growth opportunities, inability to meet payroll, losing out on new projects and more.



So, how do you work to improve your small business cash flow? There are many ways to wisely manage your money and solve cash flow problems.

  1. Invoice customers promptly. You don’t get paid until you invoice your customers, so create an efficient invoicing strategy to enable prompt payments from customers. Before any work begins, establish payment terms so your customers have proper expectations, including due date, accepted payment methods, early payment discounts and late-payment penalties. Clear payment terms allow you to accurately project cash flow and keep your business running smoothly.
  2. Don’t make early payments. Paying suppliers early has disadvantages, even if you’re getting a discount. You don’t want to risk running low on cash, especially if your cash flow is tight. This could impact payroll and other more pressing cash flow outflows. Often, the discount you’re getting from the supplier is less than your return on investment in that timeframe, which means the discount is not worthwhile. The exception to this rule is to keep your supplier happy – your relationship with them is important and if paying early improves that relationship, go for it.
  3. Use accounting software for cash flow management. Leverage technology to help you become more efficient and improve your cash flow. There are lots of options available, from simple tools to robust platforms with lots of bells and whistles. This software can help you reach your financial goals by forecasting opportunities and challenges while helping you make smarter business decisions.
  4. Have an emergency fund that will last at least three months. Set aside cash for unforeseen circumstances or financial emergencies. From natural disasters to health challenges and everything in between – some factors are simply out of our control. But you can control the potential impact of those emergencies by building up cash reserves. You won’t have to dip into personal funds, and you can keep your cash flowing. Start small and know that it may take time to build up a sufficient emergency fund. As your sales pick up, contribute more to the emergency fund. There’s no better time to start saving than right now.
  5. Keep optimal inventory on hand. Many small businesses make bulk purchases to take advantage of supplier discounts. But this ties up cash when the inventory is just sitting on the shelf. For example, a veterinary drug rep offers a 5% discount for bulk purchasing flea and tick medication, so the vet buys 10x the amount they need to do business. This ties up their cash and limits their ability to deploy the cash elsewhere. However, you want to have enough inventory to meet customer demand, so finding that optimal amount is key. While the amount of inventory kept on hand depends upon the business, the concept is the same – keep only what is needed to comfortably operate.
  6. Keep accurate and detailed accounting records. You must understand the full financial picture of your business to make smart decisions, and you can’t do that without comprehensive financial statements. Optimizing your cash flow is a delicate balance and you’ll need transparency into your financial records. Maintaining financial statements is a critical element to the success of your small business, as these statements reveal opportunities to grow, challenges that must be overcome and plans for your future.
  7. Lease equipment instead of buying it. Minimize upfront costs for equipment so you won’t drain your cash reserves. When buying costly equipment, the down payment can be substantial and could impact cash flow. With a lease, you typically just need to put down a deposit or just start paying on the lease. Monthly lease payments are often smaller than loan payments for purchased equipment. As a bonus, it’s easier to access the latest and greatest technology if you want to trade in your equipment. Upgrade to the newest model when your lease expires, and you don’t have to worry about selling anything. Plus, you don’t have to pay to maintain the equipment, the vendor typically assumes maintenance responsibility.
  8. Reconcile bank accounts monthly. By performing monthly reconciliations, you’ll have insight into your most up-to-date cash position. The objective of a bank reconciliation is to essentially double-check your accounting records by comparing your business accounts against your bank statements. It helps uncover any discrepancies that could’ve been caused by human error or fraud. You want to keep an eye on cash flow and bank balances to ensure you can pay bills and keep your business moving forward.
  9. Raise your prices. With inflation at its highest rate in three decades, it costs more to operate your business. As operations costs increase, cash flow can decrease. Raising prices in today’s environment is standard. Be honest with your customers about why the increase is necessary.
  10. Keep cash in accounts that will earn interest. Put your money to work by opening a small business savings account. This is a great account to stash away funds while earning interest on your money. If you have a cash flow shortcoming, you can tap into the business savings account to cover the gap. Be sure to research various account options and look for no maintenance fees, a competitive interest rate and FDIC insurance, like Live Oak’s business savings account. Watch your money grow each month while safeguarding your cash flow.
There are many ways to approach improving your cash flow, which should be a priority for your small business. You’ll set your business up for success if you can properly manage and project cash flow to cover your expenses.

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