Share
Back to blog
The Ultimate Guide to Improving Your Small Business’ Cash Flow

The Ultimate Guide to Improving Your Small Business’ Cash Flow

Are you a small business owner looking to improve your business’ cash flow? You’ve come to the right place! Cash flow problems can be daunting and unavoidable for many entrepreneurs. How does paying a liability in cash affect the accounting equation? What is the difference between net income and cash flow? These are just some of the questions you’ll face.

At any rate, having a plan in place will better equip you to stay on top of your business’ cash flow. So in this blog, we’ll break down what cash flow is, discuss best practices for improving it, and provide actionable steps that will help you take back control of your finances.

Understanding Your Current Cash Flow Situation

Every small business should understand their current cash flow situation in order to grow and succeed. Tracking your income sources and expenses is the first step toward understanding your current cash flow. Keep organized records of revenue and expenses associated with small business activities, such as rent, salaries, taxes, supplies, travel costs and other operating costs.

Cash flow also incorporates expected future revenue streams and accounts receivable into your budgeting process. Knowing what you are taking in and spending on a daily basis helps small businesses stay on track financially and make informed decisions about where to invest for improvements or expansion.

Areas Where You Can Improve Your Cash Flow

While maintaining a small business’ cash flow can be a challenge for any entrepreneur, improving it will definitely help you rise to new heights. And no matter where you’re at in your business journey, there are always areas in your cash flow to improve upon. These include:

Pricing Strategy

One of the first areas you should look at when trying to improve your business’ cash flow is your pricing strategy. Make sure that you are not pricing your products or services too low. If you are, you may be leaving money on the table that could be used to improve your cash flow. Additionally, make sure that you are not pricing your products or services too high. If you do, you may find it difficult to attract and retain customers.

Accounts Receivable

Another area to look at when trying to improve your business’ cash flow is your accounts receivable. This is the money that is owed to your business by its customers. Make sure that you have a system in place to track who owes what and when the payments are due. Additionally, make sure that you follow up with customers who are late in paying their invoices.

Accounts Payable

In addition to reviewing your accounts receivable, you should also review your accounts payable. This is the money that your business owes to its suppliers. Make sure that you pay your invoices on time so that you do not incur late fees. Additionally, try to negotiate longer payment terms with your suppliers so that you have more time to pay them back.

Inventory

Another area of cash flow that you should review is your inventory levels. Having too much inventory can tie up a lot of cash that could be used for other purposes. On the other hand, having too little inventory can lead to lost sales and unhappy customers. Try to strike a balance between having too much and too little inventory on hand.

Business Expenses

Finally, another area to look at when trying to improve your business’ cash flow is your expenses. Make sure that you are not spending more money than necessary on things like office supplies, marketing, or travel. If you can cut back on some of your expenses, you will free up more cash that can be used to improve your business’ cash flow

Tips to Improve Your Business’ Cash Flow

Managing business cash flow is one of the most important tasks in order to ensure that your business remains profitable. Without proper management, you may run out of money before you break even or cover expenses – and nobody wants that! Here are some tips to help improve your cash flow:

Understand Your Business’ Cash Flow Cycle

The first step to improving your business’ cash flow is to understand your cash flow cycle. The cash flow cycle is the time it takes for your business to receive payment from its customers, convert that payment into cash, and then use that cash to pay its suppliers. By understanding your cash flow cycle, you can identify areas where you may be able to improve it.

Offer Discounts for Early Payment

One way to improve your business’ cash flow is to offer discounts for early payment. This will incentivize your customers to pay their invoices more quickly, which will help to shorten your business’ cash flow cycle. You can offer a variety of different discounts, such as a 2% discount for payments made within 10 days or a 5% discount for payments made within 30 days.

Require Advance Payments

Another way to improve your business’ cash flow is to require advance payments from your customers. This means that you will receive payment from your customers before you have to pay your suppliers. This can be done by requiring a deposit on orders or by offering a discount for payments made in advance.

Extend Your Payment Terms

You can also improve your business’ cash flow by extending your payment terms with your suppliers. This means that you will have more time to pay your invoices, which will give you more flexibility in managing your cash flow. However, you should only extend your payment terms if you are confident that you will be able to make the payments on time.

Manage Your Inventory Carefully

Finally, you need to manage your inventory carefully. This means only ordering the inventory that you need and not tying up too much of your money in inventory that you may not sell for some time. Additionally, you should try to take advantage of discounts offered by suppliers for bulk orders

Mistakes to Avoid When Improving Business Cash Flow

Making mistakes when trying to improve cash flow can be detrimental – putting you back at square one and resulting in costly errors. To help you get ahead, it’s important that you’re aware of some common pitfalls so as not to make them yourself. These include:

Not Tracking Expenses

One of the biggest mistakes businesses can make when trying to improve their cash flow is not tracking their expenses. Knowing where your money is going is crucial in order to make informed decisions about where to cut costs. There are a number of expense tracking software programs available that can make this process easier.

Not Offering Payment Plans

Another mistake businesses often make is not offering payment plans to their customers. If your customers are struggling to pay their bills in full, offer them the option to pay in installments. This will help them to stay current on their payments and avoid late fees, and it will also improve your cash flow.

Not Negotiating with Suppliers

If your business is paying more than it should for supplies, you’re not doing your cash flow any favors. Be sure to negotiate with your suppliers in order to get the best possible price for the goods and services you need.

Not Prioritizing Accounts Receivable

When it comes to improving cash flow, accounts receivable should be a top priority. Make sure you have a system in place for quickly and efficiently collecting payments from customers. This may include using invoicing software or hiring a collections agency.

Not Reviewing Finances Regularly

Finally, one of the most important things businesses can do to improve their cash flow is to review their finances on a regular basis. This will help you to identify any areas where you may be able to save money or make changes to improve your financial situation.

How Loans Can Help Improve Business Cash Flow

Taking out a loan is a great way to improve your small business’ cash flow. By having ready access to financial resources, you’ll be able to:

Cover Operating Expenses

One of the primary benefits of taking out a loan for your cash flow is that it can be used to cover operating expenses. Many businesses struggle to make ends meet each month, as they have more expenses than they have revenue. A loan can provide the funds necessary to cover these expenses, which can help the business to stay afloat.

Invest in New Opportunities

In addition to covering operating expenses, loans can also be used to invest in new opportunities. This could include anything from expanding the business to hiring new staff. Investing in new opportunities can help the business to grow and thrive in the long-term.

Build Business Credit

Taking out a loan can also help build business credit. When businesses make timely payments on their loans, it will reflect positively on their credit score. This could make it easier for businesses to qualify for loans in the future and could also help them get better terms and rates.

Final Thoughts

Maintaining a positive cash flow is essential for any business, no matter the size. If you’re looking to improve your own cash flow, be sure to check out the guide above. It’s packed with information on how you can better manage your money and keep more of it flowing into your business. Thanks for reading!

What to read next

What is Asset Financing: Overview, Importance, and Types

Asset financing can seem complicated, but it’s quite simple. But, the jargon used in the industry can be confusing, especially as some asset financing methods have terms that sound identical, abbreviated, or used interchangeably.

  • by John Valerie
  • July 16, 2019

Is Bookkeeping Hard? Everything You Need to Know

Is bookkeeping hard? The short answer is no. It’s a common misconception that you need a formal education to be a bookkeeper, but anyone with solid math skills and the right resources can do it.

  • by Jake Eisenberg
  • August 1, 2022

Let's talk small business.

There’s the 1West way to get smart financing fast — and there’s everything else. We believe in your small business and we believe in our approach. No nonsense. No surprises. Just expert guidance from start to finish.

Find out what's next