How Can a Business Improve Its Cash Flow?

Date posted: August 29, 2017

cash

By Alison Nailor, Sageworks

No business owner would say “no” if asked whether they wanted to increase their company’s cash flow, yet in the day-to-day rush of running a business, it is difficult to take the time to identify ways to boost cash flow and plan accordingly. Doing so, however, can have a significant impact on your business’s growth. The following are four well-acknowledged ways to increase a company’s cash flow.

1. Enforce payment incentives and penalties.

Invoicing and payment can be a drawn-out process. Send invoices to clients immediately after your service is completed and provide incentives for clients to pay quickly. Create and enforce penalties for late payments. Try offering discounts for early payments, particularly for large accounts, and add interest to late payers. Speeding up the payment process is one of the best ways to improve a business’s cash flow.

2. Re-negotiate contracts.

Evaluate existing contracts and consider re-negotiating contracts to make sure that your business is still getting a good deal for various materials or services. This especially applies to long-term contracts, as suppliers of goods and services are often willing to provide special discounts or re-negotiate with consistent clients. Ensuring a long-term business relationship with your company is important to them. Often, re-negotiating your contract can decrease your business’s costs and increase cash flow.

3. Assess and improve inventory.

Consider getting rid of some old inventory that isn’t selling, even if you have to discount it to get it out the door, and don’t keep more inventory on hand than you need. Keeping excess inventory in stock is an easy way to gobble up cash quickly. Also, try implementing a “Just in time” (JIT) inventory approach, only purchasing raw materials or building product inventory right before you need it. This can cut costs of holding inventory and keep you from overbuying. When inventory is tight and effectively managed, it generates cash flow instead of weighing the business down with unnecessary costs.

4. Re-evaluate and update your pricing.

Do your prices reflect any recent increases in costs? If not, it may be time to raise prices. While doing so may seem to put your business at the risk of losing customers, clients actually expect businesses to raise prices a bit over time, especially if the product or service is providing value to them. When exploring how to raise prices, check the prices of your competition as a guide. You may not want to be the most expensive, but you certainly don’t want to be the least expensive either.

Also, try to avoid using discounts to attract customers, instead, make sure your staff can help sell the value of your products or services. It is important to periodically evaluate prices to make sure you are competitive and maximizing cash flow in this area.

There are many ways to improve your business’s cash flow, but payment incentives and penalties, contract re-negotiation, inventory assessment and updated pricing are some of the most highly acknowledged methods. Implement these practices and see the resulting growth in your company’s capital.

Alison Nailor is on the data and research team at Sageworks, a financial information company that provides financial analysis and cash flow applications to business owners and their accountants.

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