5 Strategies That Will Make You Worry Less About Cash Flow

Finance Insights for Professionals

Finance Insights for ProfessionalsThe latest thought leadership for Finance pros

Thursday, September 19, 2019

Cash flow concerns can hit businesses of any size. If you're consistently struggling with negative cash flow, it's time to take steps to turn it around - whether that means upping your prices, selling off old inventory or being stricter about invoicing.

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Concerned about your company’s cash flow? You’re not alone.

According to a much-cited US Bank study, 82% of business failures are down to poor cash flow management. Generally, the issue tends to affect smaller enterprises more – Intuit Quickbooks found that 69% of small business owners have been kept up at night worrying about it – but that doesn’t mean big businesses are immune.

To put it simply, it doesn’t matter how large your business or even if you’re profitable; if you regularly find yourself faced with negative cash flow, you’re in trouble.

Fortunately, there are some tried-and-trusted techniques you can use to ease your cash flow headaches:

1. Take control of your invoicing

It pays – literally – to tighten up your invoicing process. There are several ways to do this:

  • Send email reminders just before your payment due date and on the day itself. And don’t be afraid to chase up late payers.
  • Offer an incentive (such as a small discount) to customers that pay within a set period – two weeks, for example – of receiving your invoice.
  • As well as rewarding early payers, make it explicitly clear in your terms and conditions that penalties will be charged for late payment.
  • If cash flow is particularly tight, consider invoice factoring, or selling on your unpaid invoices to a third party for a slightly smaller lump sum.

Additionally, be sure to take advantage of early payment discounts yourself wherever possible.

2. Lease rather than buying outright

It might seem counterintuitive to pay more for an asset over time than simply buying it upfront, but leasing can be a fantastic way to manage cash flow when things are tight.

Unless you happen to have a large lump amount of cash in the bank, leasing helps you to maintain cash flow by allowing you to pay in installments rather than a big lump sum.

3. Scrutinize your customers

One of the best ways to solve a cash flow crisis is to ensure that you never get into one in the first place.

Late invoice payments are a major cause of cash flow struggles, so unless your customers are prepared to pay in cash, be sure to credit check them – ideally before you’ve agreed to work with them.

If they have poor credit, it’s a safe bet they’ll regularly miss payments. Armed with this knowledge, you can decide whether to charge them more to mitigate the risk or build their late payments into your financial model. Ultimately, you may simply feel it’s not worth the hassle to take them on in the first place.

4. Charge customers more

The worst cash flow catastrophes require drastic measures to resolve. If you regularly find yourself struggling with negative cash flow, it’s time to seriously think about raising your prices.

Obviously, this isn’t a decision to take lightly. Before charging your customers more, consider the following factors:

  • How do your current prices compare to those of your direct competitors?
  • Do your prices offer sufficient margin once the cost of creating and selling your product has been accounted for?
  • How much labor goes into designing and creating your product?

You may come to realize that your challenging cash flow situation has largely been caused by undervaluing your product – in which case, a price increase is a simple and justifiable solution.

5. Manage your inventory

If you sell a physical product, having large amounts of it stashed in a warehouse or stockroom is a surefire way to eat into your cash flow.

Analyze your current inventory level. Are there certain product lines that simply aren’t shifting as well as the others? If so, take steps to move them on – even if that means eating into your margin.

This can be difficult, particularly when it comes to products you’ve developed in-house. But it’s important to strip the emotion from your decision; if a product isn’t selling at the moment and your cash flow is poor, you may not have the time to wait for demand to pick up.

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