Cash flow is the lifeblood of your business. It’s how you fulfill your own debt obligations, like paying suppliers, employees, and other bills like keeping the lights on. But it’s also essential for driving growth.
Yet, so many companies with a great model and smart founders go belly up because they fail to manage cash flow effectively, running into a point of bankruptcy. Maybe this is something you’re stressing about right now - but you can take a deep breath and relax.
We’re going to show you how to improve cash flow in small businesses here in this guide so you can stay ahead of issues and build up a safety net or invest in future opportunities.
You’ll learn quite a few ways to improve cash flow below, but really, there’s one simple tactic that can solve all your concerns: get paid faster. Our accounts receivable automation software helps you streamline the invoicing process, which is where many cash flow problems arise.
Start your free trial today and see for yourself what a difference it can make in your ability to generate consistent, predictable cash flow - while saving a ton of time and stress on manual billing!
Before we get into how to improve your cash flow let’s take a step back and explain why cash is important to a business. We mean it when we say that you can’t keep your company alive without it. Even profitable businesses fail when they don't manage cash flow properly.
Without enough liquid assets on hand to cover day-to-day expenses, you risk falling behind on bills or even shutting down operations. You’ll struggle to pay your employees, your suppliers, and all the other costs associated with keeping your company running.
In contrast, generating strong, consistent cash flow not only offers peace of mind but allows your business to be flexible in the face of emerging opportunities. You don’t have to worry about running to the bank and trying to get a loan when you can fund your own investments.
But, cash flow also helps you build up a safety net that can provide a cushion if things slow down, whether it’s an industry downturn or seasonality.
So, how do cash flow problems usually start? Let’s unpack the most common causes below, as this knowledge will help you avoid making the same mistakes.
All businesses worry about cash flow to a certain extent, but this is an especially pressing issue for small businesses. There are a few reasons why:
You’re probably all too familiar with the frustration of chasing payments from your customers. Even if you’re providing an exceptional service or delivering top-tier products, customers may not make paying their invoices on time a priority.
Small businesses in particular rely on an accelerated cash flow cycle because you don’t yet have the cash flow buffer that a larger company might have. You need those invoices paid quickly so you can cover your own expenses.
Given how late payments can disrupt your company’s operations, it’s worth investing in the best AR automation software. Wait - what is AR automation software, and what role does it play in improving cash flow?
We’ll talk more about this in a bit. In fact, it will be central to our discussion on how to improve cash flow. For now, let’s look at some other causes of cash flow issues.
Even if you’re getting paid on time and managing cash flow well, unpredicted expenses seem to constantly pop up. Whether it's an equipment breakdown, an unforeseen repair, or a sudden increase in supplier costs, these can all eat into your working capital.
Without a solid cash flow strategy in place, small businesses can quickly find themselves short on funds when these surprise expenses pop up. This goes back to the need for a solid safety net you can fall back on in times like these.
Managing cash flow is a challenge, but so is managing your supply chain. Early on you might not have a solid inventory forecast process in place - after all, your company is still growing quickly.
Overstocking ties up cash in unsold goods, while understocking can result in missed sales opportunities and customer dissatisfaction. Finding that sweet spot is difficult, but essential. Supply chain delays or shortages can also create unexpected costs as you have to expedite orders or find alternative suppliers on short notice.
If you aren’t actively forecasting accounts receivable, it’s easy to lose track of how much money is coming in and going out. Many business owners are focused on growing their customer base or delivering their services, so cash flow tracking sometimes takes a backseat.
But, managing your cash flow is clearly not something you can take lightly. Otherwise, you risk overspending, missed payments, or failing to cover essential expenses.
No matter how you got into this mess, we’re here to help you claw your way out with our top 10 ways to improve cash flow. As we said from the start, most of what we’ll talk about here in this guide on how to improve cash flow in small business can be traced back to one simple tip.
Get paid faster!
So, we’ll show you all the ways you can do exactly that below, turning the tap on steady cash flow and growing your company to its full potential.
The sooner you send out invoices to clients, the quicker they can pay them. As obvious as this may be, we see far too many companies taking their time in billing their clients.
But if you wait to send invoices, your client may get the impression that timely payment is not a priority for you - so why should it be for them?
Leveraging a billing automation system is one of the best ways to improve cash flow because it sends invoices as soon as they’re created. Depending on your solution, you may even be able to automate the sending of a payment reminder email or SMS, too.
This will also reduce manual errors, a common accounts receivable challenges and one that automation can help with. Learn more about how to automate accounts receivable in our blog.
This is another tactic that should go without saying, but it’s one we need to frequently remind business owners of. Let your clients know upfront when they are expected to pay and what the consequences are for late payments.
This involves clear invoice late fee wording and actually following through with charging the maximum late fees by state. You need to set the tone upfront that you will not tolerate late payments.
As far as the specific terms you lay out, that will depend on your financial situation and the relationship you have with a client.
Standard payment terms, such as Net 30, might not work for everyone, so consider adjusting them based on your business needs. If cash flow is tight, shorter payment terms like Net 15 can speed up cash collection.
If you’re not sure how to structure your invoices with all the necessary information and payment terms, browse our blog. We have plumber invoice templates, lawyer invoice templates, software company invoice templates, lawn care invoice templates, and landscaping invoice templates.
One of our top tips in our guide on how to get invoices paid faster is to incentivize your clients to pay early. This can be as simple as applying a 2-5% discount for invoices paid within a specified timeframe, like 72 hours.
But a lot of times, the fear of loss exceeds the pleasure of gain. What we mean by that is you should also penalize late payments harshly. We touched on the need to clearly lay out late fees above.
These two tips will go a long way in accelerating your cash flow cycle while reducing that frustrating feeling of bugging a client to pay their bill.
Sometimes you’ll work on a project for weeks or months before sending out the final invoice. This is a long time to dedicate time and resources to single client without capturing funds, which is why you might consider taking deposits or working off a retainer system.
Collecting at least some payment upfront will offer immediate cash flow and reduce the risk of unpaid invoices down the road. If nothing else, it will cover some of your costs should you end up struggling to get the full payment from a problem client.
This works well for service-based businesses like contracting or consulting, and we have a more detailed guide on requiring deposits in the landscaping business if you’d like to learn more.
Of course, you need to be making cash flow management a priority - otherwise, how will you know if the steps you’re taking are working or not?
We suggest reviewing your cash flow statements frequently as this will uncover potential problems early before they start spiraling into bigger issues that you might not be able to recover from.
For example, if you notice a falling behind on payments or a supplier increasing their costs, you can intervene early and try to mitigate the effects these issues can have on your financial health.
Fortunately, InvoiceSherpa makes this easy with a dedicated AR portal where you can monitor cash flow at a glance - including all outstanding invoices, should you decide to start sending invoices to collections.
We touched on the challenges that inventory management can create in your cash flow cycle earlier. This is such a common issue that we need to touch on it here in our guide on how to improve cash flow.
Businesses that sell physical products need to find the line between holding too much inventory and not having enough to meet demand.
Neither of these extremes is ideal, as having excess inventory ties up your cash in stock that isn’t moving, while understocking can lead to missed sales opportunities.
Fortunately, there are plenty of systems you can integrate into your business that will track real-time sales trends and help you adjust your stock levels appropriately.
Speaking of inventory, you should try to negotiate favorable terms with your suppliers just as you set payment terms with your clients. This is something that makes sense to explore as you scale up. The more you’re ordering, the less you should be paying.
But even if you can’t get lower costs, you should at least get more grace for when you have to pay for your goods. Extending payment terms with suppliers lets you to hold onto cash longer, improving cash flow without disrupting operations.
If it makes sense for your specific business, consider learning how to set up recurring payments for repeat purchases or ongoing services.
This will provide more consistent cash flow while making life easier for you and your customers since you aren't generating the same exact invoice for them to pay every single billing period.
Many service businesses - such as SaaS companies, maintenance providers, or consultants - find that offering monthly or quarterly subscriptions not only boosts cash flow but also improves customer retention for this exact reason - it’s a more frictionless experience!
Time spent on administrative tasks like invoicing, payment tracking, and following up on late payments can suck the life out of your business, draining resources and energy.
This is especially prominent in small businesses where an individual who is managing this process might have a separate role entirely. While the idea of outsourcing to accounts receivable management services is tempting, it’s typically too expensive at this stage.
That’s where the benefits of AR automation come into play. Automating these processes can save you valuable time and money while improving cash flow.
There are so many powerful accounts receivable automation use cases - from invoice generation to payment reminder messages, AR reconciliation, and more. The key is to find software that checks all these boxes and fits your budget. Easier said than done.
But that’s why InvoiceSherpa has become the #1 choice for any small or mid-sized business seeking the best automated invoice processing software: it’s like hiring a full time AR employee for just $49 per month!
It handles everything from A to Z and will also make life easier for your customers since they get their own personalized portal to manage payments. They can pay via credit card or ACH, and if it makes sense, you can even set up recurring payments for them!
It integrates directly with your accounting platform so that anytime a client pays their bill it syncs over to Quickbooks, Clio, or Xero automatically. Other integrations include PayPal, Stripe, Authorize.net, and more.
Our solution is trusted by the likes of Patagonia, Smartsheet, Yieldmo, Datanyze, You Visit, and more. Once you see what it can do to streamline your invoicing process and accelerate your cash flow cycle, you’ll understand. Try it risk-free for 14 days!
Despite your best efforts, there may be times when you face a cash flow gap. Don’t panic, it doesn’t mean you have to go bankrupt. You just need to secure a line of credit with your bank.
This will provide a cushion when cash flow is tight so you can cover short-term expenses while waiting for payments to come in.
Just be sure to use it wisely and not rely on it as a long-term solution. By following our advice on how to improve cash flow in small business, you will likely not need to resort to this!
That does it for our guide on how to improve cash flow! This is something every business should prioritize, but especially smaller businesses that are more susceptible to cash flow problems.
Our blog has additional accounting tips on the accounts receivable automation best practices like how to calculate accounts receivable, demand for payment letter, unbilled receivables, accounts receivable automation solution costs, non-payment of invoice law, and more.
At this point, though, we want to remind you once more that this entire guide on how to improve your cash flow can be summarized in one simple piece of advice: work towards getting paid faster.
So, leverage automation to reduce late payments, boost your cash flow, and create a more seamless experience for your customers while simplifying invoice management. Enhance your billing process with just a few clicks at InvoiceSherpa today!
Posted on October 3, 2024
