How To Improve the Cash Flow of a Business: A Step-by-Step Guide

Whether you have a new business or a fast-growing company, it’s important to make sure you have consistent cash flow, and that you’re tracking it appropriately with accounting software. Cash flow measures how much money is moving into your business as revenue and out of your business as expenses in a specific period.

Inconsistent cash flow can make it difficult to manage your finances and leave you struggling to pay your bills on time. Unpredictable income or delayed payments from customers can also create a lot of financial stress.

The good news is that you can use several different strategies to streamline your cash flow and ensure there’s always money coming in the door. Keep reading to learn how to improve the cash flow of your business.

Key Takeaways

• Cash flow is a measure of how much money is moving into and out of your business in a given period of time, with the aim of having consistent cash flow.
• Poor or inconsistent cash flow can stem from factors including late customer payments, rising expenses, or poor inventory management.
• You can improve your business’s cash flow through strategies like encouraging faster payments from customers, rearranging your bill payment dates, keeping cash reserves in a savings account, and moving inventory more quickly.
• Other strategies to improve cash flow include renting equipment instead of buying it, seeking out financing, and creating a cash flow forecast.

What Is Cash Flow and Why Does It Matter?

Cash flow is a measure of how much money is entering or leaving your business over a given period of time, like a month, quarter, or year. Simply put, businesses have positive cash flow when they have more income than expenses and negative cash flow when expenses exceed income.

While positive cash flow is necessary for profitability, consistency is equally essential. Ideally, businesses should have steady cash flow—meaning they have roughly the same income and expenses over a recurring period. Earning £10,000 one month and nothing the next month can be jarring for your business’ finances and create significant problems.

For example, cash flow inconsistencies can make it hard to pay bills on time, resulting in late fees or interest charges that cost your business money. Insufficient cash on hand can also make it hard to purchase supplies for ongoing work or leave your business vulnerable if an unexpected expense hits. All of this can result in financial stress and prevent you from focusing on other aspects of running your business.

Understand Your Cash Flow Issues

Inconsistent cash flow can stem from several causes, such as overdue customer payments, overlapping billing dates, changing prices for raw materials, and more. Knowing which of these issues is causing cash flow problems for your business is key to making informed decisions about the solutions you need.

You can better understand your cash flow challenges by thoroughly analysing your business’s income and expenses. To do this, choose a timeframe, such as daily, weekly, or monthly. Then, list all your income and expenses in that timeframe for 10 to 20 sequential periods. So, for example, if you choose a weekly timeframe, you should have a list of all your income and expenses by week for several months.

From this, you should see when you had periods of low or negative cash flow. You can then dive in further to determine whether the cause was a missed customer payment, several bills due around the same time, or something else.

How To Improve Your Business’s Cash Flow

Improving your business’ cash flow takes work, but the financial rewards are well worth it. We’ll walk through seven strategies you can take to keep money coming into your business and ensure your cash flow is as consistent as possible.

Accelerate customer payments

One of the best ways to improve your business’s cash flow is to reduce the time it takes to get paid by customers. This is especially crucial for any business that bills customers via invoice, as you can wait weeks to receive payment for goods or services that have already been delivered.

An easy way to speed up payments is to send out invoices immediately when work is completed. This gets your invoice into your customer’s hands and starts the clock on when payment is due.

Implementing late payment fees on every invoice is also a good idea. This adds a financial incentive for customers to pay you on time rather than ignore payment due dates.

You can also negotiate payment terms with customers. For example, you can reduce your payment due date from 30 days after sending an invoice to 15 days. To encourage even faster payment, consider giving customers a small discount if they pay your invoice within a few days of receiving it.

Another approach is to break payment for services into multiple instalments. You can request partial payment upfront or before handing over a deliverable. This gets you money right away and reduces the amount you’re waiting to receive when you send out the final invoice.

Finally, it’s a good idea to conduct credit checks on new customers to avoid late payments or non-payments. If a customer has poor credit, you can require partial or full payment in advance or negotiate steep late fees on your invoice.

Spread out your bills

Next, consider spreading your bills over each month to even out your cash flow. Many business credit cards allow you to choose your payment date, so you can easily choose different dates for each card your business uses. For other bills, like utilities and supplies, negotiate with your providers to select the payment date that works best for your business.

In addition, contact vendors you work with regularly to see if they will offer early payment discounts. For very large bills, you may be able to negotiate instalment plans with no interest charges.

Open a savings account

One of the benefits of evening out your business’s cash flow is that you should have additional cash on hand. Putting some of this money in a savings account with a high interest rate is a good way to generate additional, predictable income for your business.

Just be sure to keep an eye on fees when comparing business savings accounts. You don’t want to end up paying more in fees than you generate in interest income when you withdraw money to pay for a large expense.

Move your inventory

Keeping inventory that doesn’t sell is bad for your business’s cash flow since the money you invested in buying that inventory is now tied up. In addition, there are extra costs associated with storing inventory, such as higher rent, increased insurance premiums, and the opportunity cost of not being able to bring in new products.

To improve cash flow, conduct an inventory check to determine what your business owns and how long you’ve had it. Then, sell any goods you’ve had for longer than a certain amount of time at a discount. It’s better for your business to release the cash tied up in unsold inventory at a lower profit margin (or even a loss) than to hold onto items forever and be at a cash flow stalemate.

This is also an opportunity to change your business’ buying and inventory management practices. Be sure to reduce or cancel any recurring orders for inventory that isn’t moving quickly enough and instead double down on buying items that are selling well and generating income.

Rent instead of buying

Another option to improve cash flow is to prioritise renting equipment, vehicles, and buildings rather than buying. When renting, you’ll make regular small payments rather than pay an enormous amount upfront. This can increase your business’s financial stability and leave you more of a cash buffer to deal with unexpected expenses or other inconsistencies in your cash flow.

That said, if your business has a lot of cash on hand already, buying could save money in the long run compared to renting. So, it’s important to consider the total difference in cost and whether the cash flow benefits are worth it for your business.

Seek out financing

Financing can be a powerful tool for managing your cash flow because it lets you boost your business’ income or put off expenses.

One popular financing option for small businesses is invoice factoring, which allows you to obtain money immediately by selling your unpaid invoices. The bank or lender will pay you 80% to 90% of your invoice’s value immediately, then collect the full amount of the invoice from your customer. Invoice factoring can be expensive, but it enables you to get paid for your sales much faster and eliminates the work of following up with customers to collect payments.

Another option is to open a business credit card to pay for purchases. Credit cards typically allow you to choose your payment date, so you can postpone payment for up to several weeks. (You can also defer payments longer by carrying a balance on your credit card. However, you should avoid this as much as possible since credit cards have very high interest rates.)

Build a cash flow forecast

Forecasting your expected cash inflows and outflows is an essential part of financial planning for your business. It can alert you to periods of low cash flow before they happen and allow you to smooth out bumps. For example, if you know expenses will be especially high during a given week, you can move cash reserves from your business savings account to your current account ahead of time.

Building a cash flow forecast involves mapping out when your invoices and bills will be due. You can then calculate daily, weekly, or monthly how much cash should be coming into or out of your business.

Just remember that a forecast is a prediction. Customers can pay late, throwing off your analysis. Always keep enough cash on hand to pay your bills on time.