According to the Small Business Administration, “Inadequate cash reserves” is one of the most common causes of small business failures. Inadequate management of cash flow can cause increased cost of doing business through short term financing, late payment penalties and even loss of customers and suppliers. Cash flow issues are not just a problem for businesses with shrinking revenues but can also be a problem for businesses with a healthy bottom line. It is this reason why business owners should pay particular attention to improving cash flow from business operations. The following blog post will discuss the easiest ways to improve cash flow.
Financing Major Purchases
Although it might seem counter-intuitive, financing major purchases, even if you have the cash, is one of the best ways to preserve cash flows. The cash inflows from the purchase of fixed assets, for example, comes over several years through the production of goods and services; so why not match those inflows with their corresponding outflows?
Offer Discounts To Customers Who Pay Early
The best way to improve cash flow from customer receivables is by speeding up the rate at which customer receivables are collected. The easiest way to do this is by offering discounts to customers who pay early. Customers will enjoy the benefit of a discount while the business owner will enjoy the benefit of a healthier cash flow.
Streamline Customer Invoicing
By sending out automatic and timely invoices business owners can see a major improvement in cash flow. This includes electronic copies of invoices as well as reminders of when invoices are due. The faster you bill your customers the faster they will pay you back.
Pay Bills When They Are Due
Paying bills on the day they are due, even if you have the cash to pay them now can be a major help in evening out cash outflows. If a vendor gives you 90 days to pay a bill then use the entire 90 days especially if there is no interest on the payable.
Reduce Cost of Reoccurring Expenses
The best way to improve cash flow is by reducing reoccurring cost. This can be done by restructuring contracts with vendors, increasing and decreasing inventory purchases to match customer demands, refinancing debt with high interest rates to lower interest rates and reducing fixed cost like rent and cutting back on wasteful expenditures.
The simplest way to improve cash flow is by delaying cash outflows and speeding up cash inflows. There are many ways of doing just that but each technique will come with its drawbacks. Financing purchases will increase interest cost, stricter account receivable policies will decrease credit sales and developing streamlined invoicing software may be costly. However, the long term benefits of cash flow management will pay dividends in the form of increased operating health and stability.