Seven Strategies for Improving Cash Flow for Small Business


Is cash flow killing your small business? You’re not alone. 90% of small business failures are due to poor cash flow. Need strategies to improve your cash flow fast? Here are seven different strategies you can deploy to immediately improve the amount of cash in your business.

There are three ways you can improve cash flowing into your business and four options for reducing cash flowing out! These financial strategies are relevant for businesses who sell product and/or services.

Cash In
  • Pricing: lift your prices, focus on profitable revenue streams, provide more value
  • Volume: increase your customers, expand into new markets or products/services
  • Debtors: invoice earlier, follow up frequently, reduce payment terms
Cash Out
  • Expenses: reduce your overheads, identify and reduce discretionary spend
  • Assets: what can be converted to cash, sell underutilized assets or sell and lease back
  • Human Resources: match staffing levels to demand, change staff mix, reduce turnover
  • Inventory: reduce costs, improve terms with suppliers, clear slow-moving stock

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Cash In Strategies

Pricing
Setting the right price for your product or service will help maximise your profits. Increasing the price of your product or service (to a point that it doesn’t impact on customer demand) has a positive impact on your cash flow.

Don’t be afraid to implement small, regular price increases. Often this has little or no impact on the volume of sales. Can you bundle together product or services? Focus on lifting your average transaction amount. If you can get each customer to buy more you will see an immediate improvement in your cash flow.

A word of warning, if you’re pricing strategy is not right, selling more products or services will result in more cash flow but not more profit. Have you looked closely at what margin or markup you need to cover all the costs of goods associated with selling your product or service? When selling products don’t forget to factor in freight, merchant fees, even discount costs. If you have a service-based business you should include direct wages, commissions or subcontractor costs.

Volume
Need more cash? Focus on increasing the volume of sales for an immediate impact on cash flow. The easiest way to increase sales volume is to sell existing or new products or services to your existing customers. If you have a customer database, send out a brochure or email about your business. Can you offer a new product or service? Is there an opportunity to sell to new customers?

Improving your sales process by reducing the time it takes to convert an enquiry into a committed sale will also have a positive impact on your cash flow.

Debtors
The fastest way to improve your cash flow is to call in your debtors (people who owe you money). You should always make it easy for customers to pay you. Offer credit card or direct debit payment options. Automate your invoice reminders and the process of issuing statements.

Service based businesses should send progress invoices, consider invoicing an amount up front and on completion of a project. Consider if you could afford to offer an early payment discount or implement a late payment penalty.

Need help calling in your Debtors? Read our Three Step Guide.

Cash Out Strategies

Expenses
Reduce your cash outflows! The first place to look is in discretionary spending or non-essential expenses e.g. gifts for clients, donations, entertainment, staff amenities. Do you have any expenses that can be deferred? Or could you negotiate better terms such as a discount for early or upfront payments?

Reducing overheads is going to immediately free up your cash flow. Scrutinise all your operating expenses. Call your utilities or phone provider, ask for a better deal. Review your insurance policies, check all your software subscriptions. If cash flow is tight, you need to tighten up your expenses.

Assets
Most business owners fail to consider what assets they can convert to cash to help manage their cash flow. To pull the asset lever, you will need to review your Balance Sheet! Look for Current Assets section. A Current Asset is something that can be converted into cash within the next 12 months. Do you have assets listed on your Balance Sheet that are underutilised or no longer required? Sell them! Could you refinance assets to get better terms from a different lender? When purchasing an asset consider if leasing might free up your cash flow allowing you to pay for assets over a longer period of time rather than in one lump sum.

Staffing
Employing the right people with the right skill will not just help your business grow it also helps the cash flow. Matching staffing levels to demand will help reduce unnecessary overheads and conserve your cash. Could you cut back on staff hours during quiet times?

Obviously better staff retention will reduce the costs associated with hiring staff. Consider what you could do to keep your staff engaged. This doesn’t necessarily mean increasing their salary, often staff find professional development or training to be motivating, employ staff who are aligned with your business goals. Create a positive work culture.

Inventory
If you sell products, you have a Catch 22 scenario – you need to spend cash to buy products before you can sell the product and recoup the cash. Making inventory a critical lever for cash flow management. We have three suggestions.

Firstly, reduce the cost of your stock or materials by re-negotiating with your existing suppliers or finding new suppliers. Focus on improving your terms with suppliers – ask for extended payment terms or to be notified of discount or bundling opportunities.

Your next task is to review stock levels, clear obsolete or slow-moving stock. You want to reduce the amount of cash tied up in unsold inventory. Here’s a tax tip: if you find obsolete or out of date stock that your business simply can’t sell, you can write it off before June 30 and get a tax deduction in that financial year.

Thirdly, can you change your ordering process? Look for ways to reduce the time between placing and receiving an order. Could you take a deposit from your customer before ordering the product? Is there a way of automating the purchase process?

Want to learn more about how to improve your cash flow? Make sure you’re not committing any of the Seven Deadly Sins of Cash Flow Management or attend our one-day “Avoid a Cash Flow Crisis” Workshop.