Brandon Chu is a Senior Product Manager at FreshBooks, the Cloud Accounting solution helping 5 million users invoice their clients with ease. Use their free invoice template to easily send an online invoice now.
12 min. read
Updated November 10, 2023
Keeping an eye on your cash flow is vital for maintaining the health of your business. Without positive cash flow, or real cash flowing into your business regularly, you’re at risk of experiencing crippling cash flow problems. In fact, poor cash flow is a big reason why one in every four businesses won’t survive its first year, and why more than half of businesses don’t survive past the fifth.
Cash flow problems can even occur when your business looks profitable. But keep in mind that cash and profits aren’t the same things. Until your customers pay their invoices, you can’t pay your bills. So, if you’re doing a ton of business, but your customers are slow to pay on their invoices, you might still have cash flow problems.
Reviewing vendor pricing, eliminating frivolous expenses, and investing in time-saving tools are typical cost-cutting efforts you’re likely revisiting on a monthly, quarterly, and annual basis. But what happens when that isn’t enough?
Luckily, if you’re struggling to maintain cash flow and need to make adjustments immediately, there are a handful of proven methods you can start implementing today. Here are 10 tips to improve your cash flow.
One simple way to improve cash flow is to review and clean up your financial statements. You won’t be able to figure out where the money goes if you don’t accurately track it. It’s crucial that you have a firm understanding regarding the state of the following metrics:
Ensuring that these are up to date is your first priority and can help you identify potential areas to improve. If you’re struggling to maintain your books, a good accounting software solution like Freshbooks, QuickBooks, or Xero can help you keep this information up to date. Some cloud accounting solutions automate the invoicing process and flag late and unpaid invoices, so it’s easy to stay on track.
The use of this for managing cash flow is obvious. But what isn’t obvious, and may also be even more important, is that it helps highlight changes. You can get huge value from the process of regularly checking your cash flow to compare the actual results to your forecasts.
The gross values aren’t nearly as important as changes. If you’ve been going along for years with 50% of your sales on credit, and suddenly it’s 70% or 30%, that’s a red flag. You use the forecast and compare actual numbers to catch these significant trends early and make adjustments when necessary.
A good cash flow forecast highlights the key drivers of cash flow, for your business. That might simply be sales, Accounts Receivable, Accounts Payable, or Inventory, or whatever. This is why it’s so important that your books are up to date and that you’re tracking everything effectively.
Comparing out of date forecasts to incorrect actuals will only give you mismatched insight, so be sure to keep updating and revisiting these financial statements regularly.
Reviewing these financial statements monthly is a critical step to staying on top of your business’s performance. Specifically, with accounts receivable, you’re watching for troubling trends, like that your AR is growing over time because that indicates you haven’t been paid on outstanding invoices.
Businesses that are making plenty of sales, but not getting paid on time (or at all) are at risk. You can be reporting solid revenue on paper, but unless you have cash in hand, you’re not going to be able to pay your bills. Here are some tips when invoicing clients to achieve more consistent results.
To avoid cash flow problems, when you submit a project proposal or contract, set clear payment terms in writing. Likewise, when sending an invoice, ensure that the payment terms are spelled out again. Relaying a consistent reminder keeps you and your customers accountable and ensures there is no confusion as to what expectations for payment are.
Research from FreshBooks shows that using the words “21 days” as opposed to “Net 21” in your payment terms gets invoices paid more often and faster. While the words “Net 21 days” or similar makes sense to most business owners, that kind of wording may not be as clear to less business-savvy clients or consumers.
The same research also found that being polite matters. A simple “please pay your invoice within” or a “thank you for your business” can increase the percentage of invoices paid by more than 5 percent.
Large organizations hone their accounts receivable processes to maximize their own cash flow. Meaning that they are regularly testing different terms based on their customer’s needs and replacing any that don’t perform well.
If you think this method of testing would benefit your cash flow, you can try implementing new terms for a fixed period and track the results. If the changes in terms help you get your money sooner, they’re worth keeping. If not, go ahead and try again. For more resources, check out this article —it explores a number of different tactics for getting paid faster.
When you’re reviewing your cash flow statement, watch for increases in accounts payable: your bills. An increase month over month or year over year might not signal a big problem. But if you know your accounts payable are increasing and you don’t have cash in the bank to pay those ever-increasing bills, it’s time to build a strategy to mitigate the problem before it topples your business.
As opposed to decreasing the time it takes customers to pay you, you want to find ways to stretch the timeline on accounts payable and keep money in the bank.
Schedule payment of your bills to happen on the day before they are due. This is what professional organizations like utilities and credit card companies expect. This is one tactic that slows the speed at which cash flows out of your business.
Your goal is to get paid as quickly as possible and retain your cash for as long as you can without damaging your credit or your reputation. Don’t try to evade payment, just don’t pay bills a month early if you don’t need to.
Additionally, you’ll want to be on the lookout for prompt payment discounts. While a good rule of thumb is to push payments as long as possible, you may find that vendors provide substantial discounts if you pay on time or earlier. Weigh the potential cost savings here and be sure that you still have enough money in the bank if you plan on paying bills more quickly.
Similar to the balancing act of managing accounts payable, there are benefits and detriments to having massive amounts of onsite inventory. You may be able to take advantage of volume discounts with larger purchases, but that just means less cash in the bank if you’re unable to sell it.
Review your current inventory and take note of merchandise that doesn’t move at the same pace as other items. Instead of buying more, try to sell what you have and either eliminate it as part of your sales pipeline or decrease the amount you purchase.
If you decide to not order any more of a specific product, try to get rid of your current inventory. Sell it at a discount, bundle it with other successful sales items, or donate it to claim a tax benefit. Whatever you decide, try to clear out slow-moving inventory and get whatever cash you can out of them.
From there, carefully manage any future purchases and weigh the potential cost of jumping on volume discounts.
It’s not uncommon for businesses to wait until the end of the month to invoice their customers all at once. But common sense tells us that the longer you wait to send out invoices, the longer it’ll take for you to collect on them.
If you’re having cash flow problems, you might want to consider accelerating your billing process. Possibly sending out invoices the moment when jobs are complete and orders are shipped. In doing so, you ensure that your clients get their invoices faster—which hopefully means you’ll get paid quicker.
Now keep in mind that you’ll likely need to include prompt payment discounts as part of this process. If your customers are also business owners, they’re likely going through the same process of stretching their accounts payable as much as possible and require an incentive to pay sooner.
Virtually all businesses need equipment, facilities, and property to operate; whether they should buy or lease those items is another question.
If your business is strapped for cash, you might want to consider leasing equipment and renting retail or office space rather than buying it outright. In addition to getting access to the materials and spaces your organization needs to be successful when you choose to lease those items, you won’t have to tie up significant chunks of your capital. In other words, your business will be better positioned to respond to new opportunities and address unforeseen challenges.
Once you’ve solved your cash flow problems, it might be time to look into whether more long-term arrangements. Owning your property means your business will essentially be paying rent directly to you (or more specifically, your LLC)—and there are also tax benefits to take into account, too.
Make long-term investments and purchases when your business is able to successfully manage the cost. If you’re bleeding money and can’t improve your cash flow, the fact that you “own” a piece of equipment or office space is no longer an asset. Plan ahead and carefully look for appropriate times to switch from renting to owning.
If sales are stagnating—or even if they’re not—from time to time, you might want to consider retooling your marketing campaigns. One need look no further than Coca-Cola’s “Share a Coke” campaign; back in 2014, it was credited with bringing the beverage company a two-percent spike in sales.
The best part? Coke didn’t have to do a whole lot to generate these new sales; the whole campaign consists of simply having names printed on bottles and cans, the idea being that customers would buy ones featuring their names, as well as names of their friends, coworkers, and loved ones.
They successfully pulled more sales from their existing customers to grow their clientele, which is much more cost-efficient than pursuing a new market. When you look to adjust your marketing campaigns, focus on increasing dollars per customer from your existing target market.
You likely don’t even need to develop a brand new campaign to do this. Instead, test out special offers and discounts, create a membership program to reward loyalty, or identify new ways to highlight what customers love about your business. Throughout this process, look to improve your return on investment (ROI) in pursuit of producing fewer units of marketing expense for every unit of sales increase.
Make your money work for you with a high-interest savings account. This may seem like a no brainer but researching other options to stow away your savings may be a necessary exercise. Look for options with higher than average interest rates.
The higher the rate and the more you improve your cash position from other cash flow improvements, the more additional liquidity you create. It’s a simple method that requires little management and simply passively increases the gains you make.
When is the last time your company raised its prices?
If you’ve been struggling to maintain cash flow and haven’t raised prices in a while, it may be time to do so.
But don’t simply increase them overnight; you don’t want to risk turning your loyal customers away. Instead, by carefully planning your price increases and marketing them effectively, you’ll be able to generate more revenue—and maybe even more sales—while padding your bottom line.
There are a variety of tactics you can employ to reduce the likelihood your customers will get angry when your business raises its prices. For starters, don’t increase your prices unless you’re sure that your customers are thoroughly satisfied. You can also consider trying to time your price increases with improvements to your products.
For example, a software-as-a-service (SaaS) company could consider upping its subscription fees after undergoing a major upgrade and rolling out new features. Beyond that, your business could bundle its services together for a lower average rate (much like cable companies do), encouraging customers to buy more than they otherwise might.
Now even if your price increases are carefully planned and you’re still concerned about losing customers, you can always set legacy pricing. Instead of immediately changing the pricing for current customers, grandfather them into the original pricing structure for a time, and use the updated pricing model solely for new customers. While you miss out on a potential influx of cash flow with this method it does safeguard you from losing cash entirely.
Once you’ve started improving your cash flow you need to maintain it. One of the simplest ways to do this is by actively forecasting your cash position and revisiting your cash flow statements on a regular basis.
If you need help organizing your current cash flow statements and forecasts you can download our free cash flow statement or partially automate the process by checking out LivePlan. With step-by-step guidance, accurate forecasting, and the ability to directly sync with your accounting software, you can quickly gauge the health of your business and make accurate decisions to improve your cash flow.
But no matter what option you choose, make it a habit to actively revisit your cash flow forecasts and compare them to your current statements. It can help you identify potential cash flow problems before they happen and ensures that you are always informed about the state of your business.