9 Actionable ways to improve cash flow

In the world of business, cash flow is the one ring that rules them all.

According to our research, 82% of small businesses fail because of poor cash management skills or a lack of understanding of cash flow. This is the number one reason small businesses fail, sitting above fraud or market changes or shifting technology.

Added to this, 43% of businesses state that cash flow management is a source of stress. It’s easy to understand why – without cash in the bank, you can’t keep the lights on, the team employed, the printer running, and the coffee machine gurgling.

Yet, despite the risks involved, many businesses aren’t doing all they could be to maintain control over their cash flow.

Melinda Emerson, business coach and speaker, notes that business owners should expect expenses to rise before profits appear. It will take time for the added value of purchasing new equipment, adding new employees, or introducing a new service or product will impact the bottom line. This Is why cash flow is so vital – you can stall your company’s growth before it even has a chance.

In this article and associated infographic, we take a hard look at what kills cash flow in your business, and nine ways you can improve your cash flow situation:

So many business owners try to cut back on costs by doing their books themselves. Online accounting software like Xero and Quickbooks Online makes it easy to manage the day-to-day reconciliations, so filing your taxes yourself seems like the most obvious next step.

But your accountant and bookkeeper do so much more than just file taxes. For one thing, they know the tax rules, so they can make sure you’re compliant. For another, they give you visibility around your company’s financial situation. They can point out potential issues you haven’t seen or patterns in your behaviour that place cash flow in dangers. It’s this visibility that is absolutely essential to understanding and managing your cash flow.

Many accountants also act as business advisors, as they have a unique back-room view of what’s going on in your business.

No one has a crystal ball that can see into the future of your business, but according to Harriet Phimister of Float Forecasting, forecasting cash flow is the next best thing.

“Forecasting your future bank balance allows you to see when you may have a cash shortage that could cripple your business by stopping you from paying your staff, your debtors or yourself – and it gives you enough time to do something about it. As the saying goes, forewarned is forearmed.

As Harriet points out, forecasting can also benefit you even if you have a surplus of cash. Instead of leaving surplus cash to gather dust, you can make plans to spend it to improve your business, take on another project, or bring on additional staff.

Luckily, forecasting cash flow is pretty easy. There are a number of cash flow forecasting products that integrate with your online accounting software. Float, Fathom and Spotlight Reporting both create simple and accurate forecasts based on your own data with the push of a button.

One of the biggest reasons small businesses struggle with cash flow is not getting paid for the work they’ve completed. According to research conducted by Xero, only one in nine invoices from small businesses actually get paid on time.

All too often, this is because invoices aren’t sent out in a timely manner, or the method of payment is inconvenient. They get put off and then forgotten about.

Ignition actually flips the whole client payment process on its head. It allows you to collect your fees automatically instead of waiting for a client to pay an invoice (if they ever pay). This can be done on a recurring basis, or when you're finished your work. It collects the payment from their bank account or credit card and sends them a 'paid' invoice through your accounting software.

The beauty of this approach is that you know exactly when you’ll receive payment, and exactly how much you’ll get. Once you set it up you'll never have to chase clients for a payment again.

Human beings look out for our own interests. We tend to tow the line if we understand there are consequences for our actions. Likewise, we love a reward for taking action.

You can take advantage of our base instincts by implementing a payment policy that rewards and discourages certain behaviours. This is particularly useful if you can’t use automatic payments.

FE International founder Thomas Smale recommends incentives and penalties for anyone who struggles with chasing up payments and holding clients accountable.

Your payment policy can include a small discount for early payment, as well as a late payment fee that incurs as interest on an unpaid invoice.

According to the accounting team at Rightway, your payment policy or payment terms might also include:

• The currency you wish to be paid in.
• Your accepted forms of payment (cash, credit card, deposit, cheque) and any associated charges.
• Payment due dates.

Rightway also recommend discussing payment terms with your client right from the beginning, to ensure there’s no confusion and set expectations.

Credit control software automatically monitors your accounts receivable for late payments. Instead of you having to manually check which invoices have been paid, your credit control software will automatically ping late payers and send them a series of increasingly urgent emails reminding them to square up their account.

You can also set your credit control software to leave clients out of your reminder sequence – useful for those “particular” clients or projects that need a different touch!

Three solutions many of our clients use that integrate with Ignition are: Chaser, ezyCollect, and Debtor Daddy.

Lowering your expenses won’t help you collect money that’s owed to you, but it will ensure you’re better able to weather periods of restricted cash flow. Keeping costs low is just plain good business, and will place you in the best position to pivot, embrace opportunities, or make investments that can grow and improve your business.

Here are some simple ways you can lower your business expenses

• Look into your subscriptions. With many products adopting the SaaS model, you may find yourself paying hundreds of dollars out to various subscription services for CMS, marketing, accounting, admin, job management, social media, support, and other processes. Many of these may be able to be streamlined into one product or suite, and you may even discover you’re paying for products that do the same thing, or that you no longer use!
• Bank fees. Speak to your bank (or a competing bank) about your options, to find out if you could make any savings. If you don’t want to switch banks, taking a package from a competitor back to your own bank may encourage them to offer you a competitive deal.
• Utilities. Speak to your utility company about lowering your bills. It helps if you can go to them with a better deal from a competitor. Many utility companies change their packages and pricing every 6-12 months, so it pays to review this on a yearly basis to make sure you’re still getting the best deal.
• Train staff to ask for discounts. This is a great tip from author David Finkel, as part of creating a culture of cost saving\ at your company. You may like to offer negotiation training as part of professional development.

There are many other potential savings to be had if you’re willing to adapt your business model. For example, allowing your team to work from home and utilising a co-working space for meetings may eliminate costly rents.

For more great tips on cutting costs, see 27 Money-Saving Tips From Successful Small Businesses.

If your business gets into trouble, it’s pretty much too late to start looking for a cash injection to bail you out. Small business coach Melinda Emerson recommends setting up a line of credit early, well before you think you might actually need it.

“As soon as you win a big contract, take it to the bank and open as large of a line of credit as you can get. It will come in handy when you need to cover your costs to get work started before your initial payment comes in.”

The main advantage a line of credit offers you is the flexibility. Like an overdraft, you can access the money only when you need it. A line of credit is usually secured by a registered mortgage over a property, and the interest rates are lower than an overdraft.

Most business owners will approach their bank about a line of credit, but there are other options. Ondeck and Fundation provide online business loans and lines of credit designed especially for smaller businesses.

Saying “no” to a potential big contact can be hard for any business owner, but it’s an essential skill to master if you want to remain in business.

No matter how good a deal looks on paper, if it’s going to tie up cash flow for months and months your “big fish” could end up dragging your business down into the murky depths. And if the client demands onerous payment terms, things could quickly go from bad to worse.

If you have a bad feeling about a potential contract, or you’re not happy with the payment terms, don’t be afraid to walk away or bite back to negotiate a fairer deal. Your business is too important to risk. Something better will come along that will provide the cash flow you need.

All the above advice will help prevent cash flow problems in your business. But what if you’re already in a tight spot?

Invoice factoring is a financial service that can help if you’re struggling with cash flow. It’s generally only available for B2B and B2G companies. A related but slightly different service is called invoice financing, and this will handle B2C (this article explains the difference).

According to the Fit Small Business blog, invoice factoring is a service that converts your outstanding invoices due within 90 days into immediate cash.

You can use the money to stay afloat and complete the required work. Once the invoices come in, you pay the money back. You’ll typically get paid in two installments. The first is an advance of roughly 80% of your invoice total, followed by the remaining 20% (minus factoring fees) after the invoice has been paid.

Invoice factoring is a great short term solution for a company with a known reputation, good credit score, and a stable of regular clients (who also have good credit). Just be aware that if you’re not careful, you could be setting yourself up for relying on a pattern of finance to keep the business afloat. Speak to your accountant or financial advisor before considering invoice factoring.

If you’re interested, BlueVine, Kabbage, and Fundbox offer invoice factoring and invoice financing solutions for businesses.

Cash flow problems can loom large over your business like Mount Doom. But there are so many steps you can take to avoid Mount Doom altogether. With the help of an accountant, financial advisor, or other expert, take a hard look at your cash flow and business practices and identify how you can improve. Better cash flow equals a stronger business, less stress for you, and greater opportunities for long-term success.