As a business owner, you will know that irrespective of the size and profitability of a business, the sole responsibility of sustaining it lies in the hands of cash flow. If you are fumbling with the term “cash flow” read on to know the importance of a steady cash flow and how to improve cash flow to make it steady!
“Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters the most. – Peter Drucker”
How To Improve Cash Flow: Cash Flow V/S Profit
When running a business, keeping an eye on these financial parameters: cash flow and profit is very important.
- Cash flow is the sum of money that is flowing in and out of a business as deposits and withdrawals, respectively.
- Profit, also known as net income, is the difference between sales revenue and your business expenses.
For example, you are running a highly profitable business. But some of your biggest customers are taking time (30 to 60 days) to pay. This in turn drastically affects your cash flow and even delays payments to your suppliers. No matter how profitable your business is cash flow is what keeps your business running!
Any business can have a positive or a negative cash flow and you can easily identify to which category your business falls from the following pointers:
Positive Cash Flow
Negative Cash Flow
|You start reinvesting in your business||Your payroll gets affected|
|Your debts are cleared off||You are running short of cash for daily operation|
|Your liquid assets start increasing||You are one step away from bankruptcy|
Simply focus on these 9 steps on how to improve cash flow and change the focus of your business towards a positive cash flow.
9 Simple Tips On How To Improve Cash Flow!
1. Estimate Your Cash Flow
Estimating cash flow helps in planning your future steps ahead.
- Start forecasting your cash inflow by putting down the previous year’s sale.
- Also include GST rebates, assets sold, license fees, and cash inflow from other sources.
- Then forecast your cash outflow by estimating the cost taken to make goods available.
- Do include loan repayment, investment, building rent and so on.
- Now, estimate overall cash flow by summing up cash inflow and outflow.
- Finally, schedule a monthly analysis of your actual data with the estimated cash flow.
Pro-Tip: Use this information to identify potential issues and take strategic decisions to improve your cash flow.
2. Best Way To Collect Unpaid Invoices
Implement easy and effective ways to collect payments from your customers on time! Some quick tips to make your invoicing process better include:
- Sending invoices quickly
- Using reminders to prompt your customers of the outstanding invoices
- Changing your terms in such a way that late payments incur penalties
- Offering incentives for those who pay early
Pro-Tip: Go for a plugin like “PayU Payments Plugin For MS Excel”, an all in one payments plugin. You can create and send payment links via SMS, email or both, track real-time payments and so much more. Learn more about how you can use PayU Plugin to collect payments easily.
3. Opt For Payment Platforms
Web platforms empower businesses to collect payments faster and in turn improve the cash flow. This makes collecting payments on time a cake walk. Irrespective of your online presence, you can always use a payment gateway to turn the way you collect payments easy for you. Know how to choose the best payment gateway and change the way you collect payments effortlessly.
4. Leasing Vs. Buying: Why Lease Instead
When it comes to maintaining a steady cash flow for day-to-day operations, leasing will be the best option. Leasing anything from supplies, equipment, real estate to any sort of asset, lets you pay in installments, which is a business expense anyway. Also, you can invest the extra cash on something that will benefit your business in the long run like research & development.
5. Need Quick Cash? Extend Payables
Looking for a quick way to improve cash flow? Then choose to extend payables – the money owed by a business or company to creditors, lenders, employees, or government (taxes).
This might not be a preferred option, but in a financial crunch, it is an easy way to improve cash flow. For this, maintaining a friendly relationship with your suppliers is a must. So, you can ask suppliers for a 30-day or 60-day extension. Also, make sure you extend the payables time in your terms as well, which gives you enough cash to make any large payments.
6. Cut Cost & Improve Cash Flow
Figure out the unnecessary costs of your business, like operating, overhead costs and so on and get down to business. Some simple yet effective everyday tips are:
- Opt for energy saving lights, turn off unused electrical equipment, and so on to reduce your electricity bill
- Keep your travel expenses in check by using tele- or video conference instead.
- Change your shipping policies to ensure your employees use normal shipping instead of express shipping!
7. Check Inventory From Time To Time
If a large amount of money is stuck in your unsold stock then take necessary steps to maintain a steady cash flow.
- Review your complete list of inventories like property, goods in stock, etc. regularly
- Order less stock from suppliers when you have a surplus
- Encourage your customers to buy old stock by offering discounts
8. Choose Steady Growth Plans
Growing too fast might be one reason your company is running out of cash. This so-called investment can sweep away your cash reserves until you receive cash from sales. Also, before you borrow money for funds, opt for sources that offer money at lower interest. A steady growth plan is a healthy way to improve your cash flow.
9. Make Wise Investments
Now that you know how to improve cash flow, choose to invest your cash inflow by:
- Repaying your loan obligations, without incurring penalties
- Investing in ways that increase your sales
- Opening a high-interest savings account, which can be reinvested in your business
How To Improve Cash Flow On Sales Front As Well
In addition to these 9 simple tips, here are 3 ways to improve cash flow and drive sales for your business:
1. Use Smart Strategy: Bundle Products
Providing discounts is not the same as adding value to a product. When you bundle products along with services, you can achieve that. One great example is e-commerce companies offering free returns for dissatisfied products. This strategy increases sales by driving away the fear of buying a new product seen online. Also, read how bundling products drive sales.
Pro-Tip: Offer value to what you sell at a lesser cost to increase your selling point.
2. Generate Repeat Business
If you are running a business like the retail industry, you will know how repeated shoppers benefit you more in the longer run. You can encourage your customers to shop more by using loyalty programs, VIP cards and other offers to shoot up sales which in turn increases your cash inflow.
Pro-Tip: Offer extra stock that adds value as freebies, to make shoppers coming for more.
3. Pre-Sell To Sell Off
Pre-Sell is an effective way for any business to promote their product even before it is launched and sell it to customers. This method saves your time and improves cash flow, as at least a part of the payment is collected even before the product is packed. When you pitch the product you can use terms like ‘a wise way for you to plan your future by shopping now’ or so on.
Pro-Tip: Offer to buy back old products at a fixed price to encourage sales.
Keeping your cash flowing requires discipline, planning and more than anything proper strategies such as the 9 simple ways from your end. Now with the knowledge of how to improve cash flow, you need to make every effort to keep cash flowing as it is the life blood of your business.
With all your marketing efforts for your business in place, it’s a good idea to have an all-in-one payment solution in place as well. Now to enjoy the best payment gateway experience and grow your business effortlessly!