31 Oct Ultimate guide: 36 ways to improve cash flow
Nothing is worse than running out of cash. The stress of having a negative bank balance, struggling to pay salaries or invoices on time, and not being able to cover necessary expenses is a business owner’s worst nightmare. Luckily, there are ways you can avoid ending up in that situation, or to rescue yourself, if it’s already happened.
In this guide we will show you 36 ways to improve your business’ cash flow right now. This information is collected through many years’ experience working with businesses and helping them succeed. There is no quick fix to improving your cash flow, and all these methods require hard work and a change in how you do business.
Let’s start by clearing up some terminology.
What is cash flow?
Cash flow is the flow of cash being transferred in and out of your business. We use it to measure the total difference between money in and money out, and to estimate how much cash the business will have now, later and in the future.
Operating cash flow measures how much cash that the business generates from normal operations. This is your cash flow if you don’t consider any grants, loans or other financing options that your business may or may not be receiving. It’s important to measure your operating cash flow as it will tell you whether the operations of your business generate enough income to support the business, or if you need to rely on external financing and capital.
We use the term cash flow management to describe the process of tracking a business’ cashflow. Managing your cash flow includes tracking the money going in and out of a business, analysing the results, and using the information to make decisions and changes to the way your business operates.
Cash flow forecast advantages
By analysing your cash flow, you can make a forecast which shows you how much money you’re expected to have in your bank account at any given point in time. The main advantage of a cash flow forecast is that it will allow you to make better decisions for your business. If you can already predict that you will be low on cash two months from now, you can start planning how you will handle the situation, or implement changes that will prevent it completely.
Doing a thorough cash flow forecast will let you predict the future of your business. This can remove the stress of uncertainty. Thorough forecasts can also be useful if you need to demonstrate your future business results to investors or during a valuation.
Causes of cash flow problems
There are many reasons why a business can experience cash flow problems. Some common examples are:
- Late payments, or not receiving payments from customers.
- Low profits; prices are too low or products are too expensive to produce.
- Losing clients or customers.
- Having too much stock and manufacturing too many products.
- Unpredictable changes, like an employee leaving or rent costs increasing.
- Drop in sales. This can be due to a new competitor, ineffective marketing or decreasing demand of the products or services.
- Irregular sales. This is very common for seasonal businesses, like Christmas tree retailers, or in businesses with fixed-term consultancy contracts.
Ways to improve cash flow
With cash flow management being a complex topic, we have included many ways to improve your cash flow. Some suggestions may be more suitable for your business than others. If you have immediate or severe cash flow issues, contact our advisors for individual assistance.
Increasing your sales might seem like the most obvious way to improve your cash flow, and for many businesses this can absolutely be a good place to start. There are many ways to achieve this, here are some suggestions.
Up-sell other products. In both sales and service industries, up-selling is very important. Suggest supplementary products that would benefit your customer. If you’re running a clothes shop, suggest shoes or accessories that would go well with the customer’s outfit. Sell warranties with your video games, shoe shine with your shoes, or suggest a blow dry with your hair cuts. Strategically place impulse purchase items like chewing gum near the tills to tempt queueing customers. Look into more up-selling methods to improve the amount of money you make from each sale, and increase your incoming money without getting a single new customer.
Consider subscriptions. Subscription based services are great because you keep your clients paying without them having to make a conscious choice of using your service on a weekly or monthly basis. Many online stores have an option to pay an annual or monthly fee to get unlimited free delivery. If you provide advisory, support or educational services, use a monthly retainer. Even no commitment subscriptions, like coffee cards where you get every 5th coffee free, have proven to increase the chances of customers returning.
Increase your prices. Many business owners think that lowering their prices will bring new customers in through the door, and with that solve their cash flow issues. This is a common mistake that has resulted in businesses going under more than once. Instead, consider increasing your prices. You might make fewer sales, but your margin on each sale will be higher, and you’ll have more money coming in.
Give incentives for large purchases. Bulk order discounts, or 10% off any purchase over £50 are common incentives that will drive higher sales. This is particularly efficient if you already have a large stock, and is often used by stores with seasonal offerings.
Reach out to your customer base and ask for repeat business. This can be as simple as sending out newsletters to your customers to let them know about your new stock or big sale, or you can directly reach out to clients and ask if they need your services again. A car dealership might want to contact customers to ask if they are ready to book their annual service appointment, or a dental practice might want to remind them that it’s time to book a check up.
Improve marketing to reach out to new customers. Utilize posters in your store front windows, newsletters, flyers, advertisements, social media, your website or other marketing methods to increase your customer base. You can do this yourself, or hire a marketing expert. Some marketing can be done for free, like posting a viral video online, or you can do paid marketing like Facebook ads. There are many free marketing guides online. This one from Brian Tracy is a good place to start.
Research new target markets. Sometimes businesses can have a complete turn around by changing who they target their products to. If you’re struggling to sell expensive products, consider renting them out. If you’re trying to sell to the general public, maybe see if you can also market your products or services to businesses. A freelance interior designer can help people remodel their homes, help businesses make their offices appear more professional, or design nurseries that are both safe and educational. Web designers can help businesses set up a website, but they can also help mums start a mum blog, or help sports teams set up a website to increase their sponsorships. Rethink your market, and see if there are any other ways you can bring in more business.
Make sure that it’s easy to buy your products or services
Many businesses have attractive products or services, but you have to make sure that your customers can buy them. What feels easy and convenient to you might not feel easy to your target market. Sometimes, small changes can make the whole difference. Other times, major changes can have a tremendous effect, like offering multiple payment options, or branching out to other locations.
For e-commerce, you want to make sure that the shopping experience is as easy and quick as possible, and that customers can complete a purchase without long loading screens or an excessive amount of clicks.
For businesses with a physical store or office, make sure that your place of business is accessible, and that your opening hours are reasonable. Avoid queues at the tills to increase the chances that your customers complete a purchase.
If you’re in the service industry, making sure that every phone call is answered, as well as making time to see your clients and prospective clients, can make a big difference on their impression of your business.
Invest in employees
Your employees are your best assets. Don’t underestimate the effect your employees can have on your business, and your cash flow. Here are some great ways to invest more in your team.
Give sales or service incentives. Employees tend to do better with sales if they know they will get a return for the effort. Commissions, or bonuses for reaching targets are very efficient. Having business or site wide incentives, like a meal out for everyone after reaching targets is also a good idea. Sometimes long term incentives work well. Promotions, salary increases or annual bonuses for doing well over time are suitable. This often makes employees put in that little bit of extra effort, and can make all the difference.
Hire employees or contractors to expand your business. This could mean increasing your team with other professionals, but also consider hiring someone to fill a gap that’s missing from your business. A dedicated sales assistant, a receptionist or office administrator, or a marketing assistant can drastically improve the quality of your business, increasing productivity, sales, and/or customer satisfaction.
Train and develop your staff. Your employees are one of the biggest assets that your company has, and investing in their development usually pays off in the long run. Staff that are regularly trained, developed and promoted are happier and more likely to stay in your business, and happy employees are proven to be 20% more productive, and generate 37% more sales than unhappy employees. Consider giving your employees proper training in soft skills to improve sales and customer service. Professionals can also benefit from extended training to learn new skills. A chef at a restaurant can learn new skills from taking a class on french desserts, a hairdresser can learn to also do makeup, a sales assistant can learn how to do online marketing, or an electrician can get a certificate to also work with gas.
Make sure you get paid
One of the most frustrating cash flow issues is when you have made the sales, but you’re not receiving the money. Chasing debt and invoices is time consuming and demotivating. Try to avoid these problems with the following methods.
Get paid in advance. Using card payments or upfront payments are great ways to make sure that you will be paid. Make sure to ask your customers if they are able to pay up front, or give incentives to pay in advance, like penalties for late payments or additional fees to pay later. Some examples could be requiring online payment when ordering products, or requiring a signed agreement with an active direct debit before providing your services.
Require a deposit. Sometimes it’s not possible to receive the full payment up front, for example if you’re a carpenter renovating a house. You simply don’t know the full cost of the job in advance. A solution could be to require a deposit that will cover some of the cost. This ensures that you will at least receive partial payment early on.
Do a credit check. Many businesses have started doing this, and it’s a great way to ensure that your customer is likely to pay their bills on time. Especially if you’re offering late payments, or pay per month options, credit checks should be a given.
Offer multiple payment options. Nothing is more frustrating than convincing a customer, only to find that your payment options don’t suit them. Offer payments by card or in cash, and maybe even a check option. For online purchases, you can also include Paypal, pay next month, or the option to receive an invoice.
Have a process for debt collection. Unless your only payment option is to pay in advance, you’re likely to run into debt problems or having to chase invoices. Some people simply forget to pay their invoices, and some don’t have the means to. Having a system in place to deal with these issues, or using a 3rd party to collect debt, is essential to limit frustrating situations.
Use direct debit. This is a great option to make sure you receive repeating payments. Consider changing to direct debit if you typically charge your clients a large annual fee for something like car servicing. Instead of having a one off £500 cost, which some of your customers might struggle to afford, you can offer a £45 monthly direct debit, which will earn you more money, make sure you get paid, and almost guarantee their business every year.
Have a process for handling customer disputes. Create a system for how your business deals with complaints and disputes with your customers. This could be solving it internally, or using a 3rd party. If you have a system in place, you won’t be worrying about how to solve the issues as they arise, and will increase the likelihood that the dispute will be resolved in your favor.
Raise money if needed
Sometimes it’s necessary to raise money to solve your cash flow problems. We have written an excellent article on how to raise money for new businesses. Here we list some of the common ways of raising money no matter the age of your business.
Sell unnecessary assets. Sometimes you might have property, equipment or other assets that you don’t strictly need. Selling or renting these out might be enough to get the finance your business is missing.
Take up a small loan. Loan providers and banks might be a good solution, and if you can get a good deal with reasonable loan terms, this is often the best and easiest solution to raise the money you need.
Find investors. If your business is promising, or is likely to be profitable in the future, you might be able to find investors. They typically give your business the money it needs. In return they get stock in your business, in hopes of getting a return on their investment.
Get help from third parties
Sometimes your business needs skills and knowledge you don’t have. A good solution may be to ask for help. Here are some third parties your business might want to look into working with.
Get a great accountant. A good accountant will have insight into your finances, and should be able to create useful reports and forecasts, which will help you make better decisions for your business. A proactive accountant that wants to see your grow is highly underestimated and recommended.
Use debt collectors. Hiring debt collectors to help you get paid on time or chase down debt is probably one of the easiest ways to reduce your stress levels.
Seek help where needed. Sometimes you need skills that you or your team don’t necessarily have. Use external marketers, graphic designers, web developers, social media managers, interior designers etc. to help you improve or expand your business. These can be hired as employees, or you can use consultants or freelancers based on your business needs.
Delay or minimise your payments
If you’re encountering acute cash flow issues, delaying payments might be a good temporary solution.
Negotiate good deals with suppliers. Think bulk discounts, higher credit or delayed payments when and if needed. Having a good relationship with your suppliers usually makes it easier to ask for favors down the line.
Remove unnecessary expenses. Almost everyone have some expenses they could reduce or remove, like subscriptions you don’t need. For many businesses, this is a last resort option, but if you are running out of money, it might be necessary to cut costs where you can.
Consider leasing equipment. Sometimes leasing is more cost efficient than buying, and equipment can be very expensive. Consult an adviser to find out if leasing could be the best choice for your business.
Improve products or services
At the end of the day, you need to have high quality products or services if you want your business to succeed. Improving products and services increases your chances of bringing in more business. After all, why would anyone buy from you if your competitor is better?
Increase customer satisfaction. Satisfied customers are more likely to give you repeat business, and to refer you to others. This should always be a top priority for any business.
Use referral programmes. Sometimes simply asking your customers is all you need to do – they might not even think to mention you to their friends or family even though you might be able to help them. Referral programmes with good incentives like discounts or freebies for successfully referring someone have also proven efficient.
Add new products or services. Sometimes you might be able to provide a service you didn’t even realise people needed. A gardening service business could productize their own fertiliser, create an online course in gardening for beginners, or they could expand to also offering pool, roof or pond cleaning services to their clients.
Offer multiple packages. If you’re offering service packages, remember to offer multiple options. Typically you would offer a basic package that’s reasonably priced and includes the essentials, and a premium package which costs a bit more but includes services that some of your customers would appreciate.
Work smarter, not harder
Our instinct is often to think that working harder will solve all our problems. Getting that extra sale, working weekends or late nights, or pushing employees to take extra shifts could help your business, however, we often see that simply changing how you work, instead of just how much you work can have an even greater impact. Of all the ways to improve cash flow, this might be one of the trickiest, but important changes.
Automate time consuming processes. Anything that doesn’t have to be one manually shouldn’t be. Instead of scheduling appointments over the phone, use an online booking form. Use an automated email marketing software instead of manually sending emails to your individual clients. Use smart software for automatic invoice management. All these small automations will give you more time to focus on the important parts of your job.
Systematise your sales and marketing efforts. Develop a sales process that works for your business, and a marketing system that limits how much time you have to spend doing manual tasks.
Utilise the full skillset of your employees. Encourage employees to get out of their comfort zone, try something new and learn new skills. Furthermore, make sure to use the full reach of their skills. If they are active on social media, maybe they could help you create a Facebook ad. If they have previous experience working as a florist, maybe they could help you reach out to potential florist clients. If they run a hobby website or blog, maybe they could help you create an online product or increase your online presence. Remember that your employees are more than their job descriptions, and will have skills you might not even know about unless you ask.
Having a stable, positive cash flow
Ultimately, changing your cash flow is not a quick and easy task, and without professional guidance, it’s likely to take some time to turn around the negative trend. It often takes a change in your mindset and how you do business to get to a point where you can comfortably say that you have a stable, positive cash flow.
We have worked with clients from several industries that have started out with a negative cash flow and struggled to survive. With a few tweaks to how they run their business, and a strict focus on making improvements, they have managed to turn their situation completely around. They have not only saved their livelihoods, but they are now successful and happy business owners running thriving businesses. If you want to learn more about how we can help growing your business, talk to us today.
Alan Davidson is a Chartered Accountant, director and founder of Pentins Business Advisers, entrepreneur and author of the Amazon best-seller “Achieve Your Business Vision”. With over 25 years of helping businesses succeed, Alan knows how to build a business with real value, while avoiding costly mistakes.