7 Ways to Improve Your Cash Flow
Smart small business owners have a pulse on how much money is coming in and going out of their companies each month.
They know that a business doesn’t go bankrupt based on one or two unprofitable quarters.
A business goes bankrupt when it runs out of cash to pay its creditors on time, which is why you need to manage your cash flow carefully.
Money Mastery is one of the first steps in building a better business in the ActionCOACH system.
If you haven’t done a good job watching your business’s cash in- and out-flows in the past, these seven tips can help.
1. Track Your Cash Flow Monthly
Before you can make any improvements, you need to have a basic understanding of your cash position each month. You need to know how much cash you have at the beginning of every month, and the changes to that amount from month to month.
2. Stay on Top of Invoicing
By simply invoicing clients on time, you’re more likely to receive payments on a more timely basis, which can make a huge difference for improving your cash flow. In addition, it’s equally important to follow up with outstanding invoices. The sooner you reach out, the sooner you can get your money. Depending on your client’s situation, you may want to consider renegotiating terms with them or applying a late fee to overdue invoices.
3. Create Payment Terms
If you don’t already have payment terms in place, you may want to consider having that conversation with your customers. Payment terms provide clear details about the expected payment on a sale. Generally, payment terms are included in an invoice and specify how much time the buyer has to make payment on a purchase. For large contracts, you can ask for a deposit upfront or milestone payments. This way you can generate enough cash to finance your costs without needing to pay upfront for materials or services.
4. Calculate and Compare Your Days Payable Outstanding (DPO) and Days Sales Outstanding (DSO)
Days payable outstanding (DPO) measures the average number of days that you take to pay your bills to suppliers and vendors. Days sales outstanding (DSO) is the average number of days that your customers take to pay you.
Once you have these two numbers handy, you’ll want to determine which is longer. Ideally, you want to collect payment from your customers quicker than paying off your own suppliers. So you’ll want your DSO to be shorter than your DPO.
Next, compare your DPO and DSO to your industry’s average. If your DPO is lower than the industry average, try to increase it. If your DSO is higher than the industry average, it means you may be overly generous with your credit terms.
5. Renegotiate with Suppliers to Lengthen Your DPO
One way to give yourself more wiggle room when paying your bills is to negotiate better credit terms with suppliers. You can also discuss price reductions and minimum quantities. These three areas of negotiation can be very powerful and effective if you have a strong relationship with a supplier.
6. Offer a Small Discount for Quick Payments to Shorten Your DSO
If you’d like to incentivize your customers and clients to pay you quicker, you could offer a small discount, such as a certain percent off your invoice if payment is received within a given number of days. This can be a win-win for both parties as everyone saves money.
7. Accept Payment in Various Forms
When it comes to speeding up incoming cash flow, you’ll want to make it as easy as possible for your customers to pay you. The more ways people can pay you, the quicker you can get your money. That’s why you should accept multiple payment options, including mobile payment, credit card, direct deposit, cash, and check.
There’s no better time than the present to start monitoring your cash flow. Apply these seven strategies and you’ll see consistent improvements to your business’s bottom line.
If you need additional assistance, a business coach can review your cash flow statement with you and offer suggestions. Their outside perspective may be the key to keeping more cash in your pocket.