20 Ways to Improve Cash Flow in 2016
Though clichéd, it’s safe to say cash flow is the life-blood of any business. Sustained periods of positive cash flow cause a business to survive. But to thrive, a business needs ever-increasing cash flows. Having more money coming in permits you to spend more, invest in new opportunities, repay loans, reward investors, and make your future secure.
But improving cash flow requires strategy, imagination, and a whole lot of discipline. In an earlier life, I was a business consultant. I observed that a common difference between great and mediocre businesses was that the great ones managed their cash flow better.
This might seem inconsistent with contemporary management thinking, which focuses on world-class products and superior people management. But keep in mind that all aspects of business—finances, products, and human resources— require an organization-wide discipline towards excellence. The same missionary zeal that creates an outstanding product can also improve cash flow.
Here are 20 ways to improve cash flow. Make sure that you are following as many as you can in the year ahead.
Collect Receivables Sooner
1. Prepare accurate invoices. This is really low-hanging fruit. I am pained when I find that payments get delayed owing to typographical or other errors in invoices. Send out accurate invoices every time, and you would see an improvement in cash flow.
2. Send out invoices on time. This is another easy one. Get invoices out as soon as it is reasonable to send them out. After that, get the customer to acknowledge receipt. Nothing is as frustrating as finding out on payment day that the customer didn’t get the invoice.
3. Avoid fatal exposure to new non-cash customers. This one is easier said than done. But you try to avoid shipping large quantities of goods to a new customer when you are unaware of their payment track record. If feasible, perform credit checks on new customers.
4. Require a deposit from customers. In hypercompetitive situations, this might be wishful thinking, but getting the customer to make a deposit payment can be a great way to improve cash flows.
5. Request progressive partial payments for large amounts. This sounds pretty much like the earlier point about the deposit, but is far more practical. It is reasonable for you to request multiple part payments at different stages of fulfilling a large order.
Pay Payables Later
6. Pay using a credit card when possible. Using a business credit card, you get many additional days before your payment actually impacts your cash flow.
7. Pay on the last day. I know some small business owners who pride themselves on paying up their bills sooner than required. This does not make sense. If you are worried you will miss the due date, you can set some method of automatic payment.
Avoid High Interest Rates and Penalties
8. Pay your full understanding amount on the credit card. While some may categorize this as wishful thinking too, I disagree. Credit card interest rates are prohibitive, and can be the vortex from which you can never escape. Business payments made using a credit card are a good idea to delay cash flow impact, but only if you will pay the full outstanding amount on the credit card on the due date.
9. Evaluate long-term financing vs. short-term debt. Long-term financing tends to offer significantly better interest rates than short-term contingency loans. Evaluate which one offers a superior alternative for your borrowing pattern.
10. Choose the optimal plan. Many of your expenses—telephone, cable, Internet, among others—offer several plan options. Periodically check your usage levels to ensure that you are on the best plan.
11. Be prepared for a rainy day. All businesses face the occasional cash crunch. So it’s best to have a line of credit available to tide over the slump. If possible, you should have at least two separate lines of credit: one backed by some of the assets you own, and the other that accepts receivables as collateral.
Use Cash Discounts Judiciously
12. Evaluate offering attractive discounts for advance payment. Conventional wisdom advocates offering cash discounts. I like them too, but feel that they are often stretched beyond reasonable limits. Be clear about why you are offering a discount. Are you trying to get tomorrow’s money today, or are you ensuring that you get paid at all? Merely advancing the payment date does warrant a discount, but not much higher than the cost of capital. And if the customer does not inspire confidence, advance payments are a solution, but do you really want your least reliable customers to get the best deals from you? Note: If you have offered a discounted price for advance payment, the customer better pay in advance.
13. Evaluate making advance payments to take advantage of cash discounts. This is the mirror image of the previous point. If you have adequate cash in hand at the moment, it usually makes far more sense to take advantage of cash discounts for early payments, than earning interest on your money.
Get the Best Selling Price and Buying Price
14. Get great prices, but don’t ignore payment terms. Of course, you should be biased towards choosing the lowest price. But depending upon your cash flow position at that point in time, superior payment terms might trump price when it comes to making your decision.
15. Don’t underprice irrationally. Some web-based businesses are undercutting prices like there is no tomorrow. These businesses, however, may come crashing down as soon as investor-dollars stop buttressing their cash flow. Low prices might bring in large numbers of customers and make the marketing department look successful, but it can also be classic fool’s gold.
16. Explore group buying cooperatives. Volume purchases get favorable pricing. So consider collaborating with businesses with similar consumption needs, and combine your orders to take advance of the best prices.
17. Sell stuff you no longer need. Instead of letting that old filing cabinet you no longer use rot in the corner, put it up for sale on one of the many websites that help you liquidate items you do not need. And don’t get hung up on the price you get. Do the same for excess inventory and discontinued product lines.
Ultimately It’s All About Cash Flow Discipline
18. Orchestrate cash-flow discipline in all areas of business. If your salesperson could close the sale in two meetings instead of three, your payment receivable countdown timer would start ticking a few days or weeks sooner. Cash flow sensitivity should extend beyond the confines of the finance and accounting department. All employees should be made aware of the role they can play in improving cash flows.
19. Don’t leave cash in a non-interest-bearing account. I once consulted for a business with sizeable sales, but low profits. By simply ensuring that their money did not lie idle in a checking account even for a day, I was able to improve their profits by over 12 percent. And it did not take too much effort either. I merely activated an automatic sweep-out and sweep-in option on their bank account. The sweep-out option would transfer cash balances from the checking account to a money market mutual fund account. And the sweep-in would transfer the right amount back when an issued check had to be cleared.
20. At some point be willing to drop a customer: If a customer keeps delaying payments inordinately, and turns out to be a huge burden on cash flows, do not hesitate to politely decline further business.