How to Improve your Business Cash Flow
Business Loan Articles > Article: How to Improve your Business Cash FlowMany business owners fail to understand the importance of proper cash flow. Businesses that do not have a healthy cash flow can fall prey to liquidity issues, have insufficient funds to pay creditors, and limit their company's growth potential. Small businesses in particular can be susceptible to "feast and famine" cash flow, preventing them from maintaining a cash flow to grow their business.
Every business must make cash flow forecasting a central element of their cash flow planning. Business managers absolutely must be able to identify their firm's cash flow status on a daily, weekly, monthly, and yearly basis in order to make informed and educated decisions for the company. Keeping a company's finances in order and its cashflow healthy is essential to creating a business with staying power.
The main sources of poor cash flow are:
- Creditors
- Excessive debt
- Debtors
- Quick growth
- Over-investing
- Excess slow moving stock
- Changes in the market
Below are some simple strategies for improving your company's cash flow situation.
Create a system to billcustomers for goods and services promptly
Many companies become so involved in daily management and company growth issues that they fail to promptly bill customers. Unfortunately, this can severely hinder a company's cash flow and limit its growth potential. If you don't already have a billing plan, create a system to begin billing clients for goods and services rendered shortly after providing said goods and services. Owners would also be wise to create payment plans for long-term projects and customers to keep cash flowing steadily throughout the duration of the project.
Filter customers in the beginning to avoid payment problems in the future
Prior to taking on big-volume customers or long-term projects, ask for references from the customer's other vendors. Find out whether or not the client pays on time regularly and determine if other companies have had problems with late or defaulted payments. You can also pull the customer or company's credit file to check for red flags. Filtering customers to ensure they will pay for the services rendered in a prompt manner can prevent many future billing problems and headaches.
Entice customers to pay promptly with incentives
Quick payment discounts can speed up the amount of time it takes clients to pay for products and services tremendously. Try offering clients a 1 to 3 percent discount on goods or services in exchange for paying within 5, 10, or 15 days. If the customer planned to pay the bill within the month anyway, an offer to reward them for paying faster will be greatly appreciated and often accepted.
Limit inventory to save money
Not all companies are large enough to support "just in time" inventory management systems; however, all businesses can make smart inventory decisions to improve their cash flow and financial health.Inventory that doesn't move takes up space, ties up capital, and prevents the business from earning interest on the money. Try bundling slow-moving stock with hot items to liquidate inventory or clear out space and eliminate or limit the amount of slow-moving stock purchased whenever possible. Business owners can also reduce the amount of merchandise they carry by focusing their product line and emphasizing only the most popular products.
Combine business debts with a consolidation loan
Small business owners can improve their cash flow by consolidating smaller existing loans into one loan with more favorable interest rates and terms. Although extending repayment through a longer term can seem counterproductive, the improved cash flow can be used to grow the company and offset the added costs. Be sure that the new loan carries lower interest rates and improves cash flow prior to extending the loan term and taking on additional debt.
Cash flow is a company's lifeblood, essential to growth and continued long-term success. If your business cash flow seems to follow a feast and famine pattern, taking simple steps to improve your business' cash flow health can greatly improve your company's success and reduce the stress of unpredictable financial situations. Smart business owners always maintain a firm grasp on their cash flow and are able to describe and predict their firm's cash flow situation for the week, month, and year. A focus on cash flow health can also prevent late payments to vendors, eliminate or reduce the need for expensive financing options such as overdraft accounts, and provide a company with security during tough markets.
