Managing a healthy cash flow is vital to the success of any small business. It means you can smoothly manage your daily operating expenses while maintaining a level of stability and trust with employees and vendors. When you’re ready for the next stage of growth, demonstrating cash flow is also an important criteria reviewed by lenders.
Wondering how to improve cash flow for your company? Here’s an overview of the concept, plus 10 strategies you can implement for better business cash management.
Key Points
• Ample cash flow is crucial for small businesses to cover expenses, maintain stability, and secure favorable financing.
• To speed up accounts receivable, try offering early payment discounts, such as 2/10, net/30.
• Automated invoicing software with digital payment options streamlines the invoicing process and accelerates payments.
• Strategic inventory management using demand-forecasting software optimizes stock levels and reduces costs.
• Negotiating with suppliers for faster shipping or bulk order discounts can improve cash flow.
Why Cash Flow Matters to Lenders
Cash flow measures liquidity by tracking how money moves in and out of a business. It’s also an important part of any small business loan application.
Cash Flow as a Debt Service Indicator
Lenders look at cash flow in order to determine if your business has the ability to repay existing and new debt obligations. They want to make sure that the business’s cash management practices give it enough financial stability to manage the company’s operations and debt payments. Lenders use cash flow as one of the criteria for approving a loan and a basis for details such as interest rate and repayment term.
How Lenders Evaluate Your Cash Flow Statements
Lenders can calculate cash flow starting with one of two metrics: earnings before interest, taxes, depreciation, and amortization (generally known as EBITDA) or revenue.
From there, the lender subtracts relevant operating expenses (such as vendor payments and payroll) and capital expenditures. They’ll also account for the debt payments you would make for the new loan you’re requesting. All of this information helps the lender determine how much risk they’ll take on by approving the loan or business line of credit.
10 Effective Strategies to Improve Business Cash Flow
Whether you’re planning to apply for a loan or simply want to strengthen your company’s financials, these 10 steps can help you increase cash flow.
1. Accelerate Your Accounts Receivable
One of the easiest ways to improve cash flow is to focus on how quickly your accounts receivable are paid. Once you’ve calculated cash flow and analyzed billing schedules, you may see ways to speed up customer payments through incentives or policy changes.
For instance, you could require upfront deposits, regardless of whether your company is service-based or inventory-based. This reduces the risk of late payments by ensuring some cash arrives before your business provides any client services or delivers any goods.
Another option is to offer early payment discounts. A common discount is 2/10, net/30. That means an invoice is due in 30 days, but the client will get 2% off if they pay within 10.
2. Optimize Your Invoicing Process
Remove as much friction as possible from the invoice process in order to get funds in hand sooner. Create a clear invoice template with all the information your customers need. For an even easier process, use invoicing software that automates payment reminders. This can incentivize faster payment while reducing the follow-up burden on your accounting team.
Also, embed digital payment options into your online invoices. Instead of customers sending a paper check via snail mail, you’ll encourage them to pay fast using a credit card or ACH payment.
3. Manage Inventory Strategically
Better inventory management can also be a way to increase cash flow. Unsold goods can hurt your bottom line and slow your company’s growth. Consider keeping less inventory on hand, especially items that you know tend to sit longer.
Digging into your historical data or even incorporating demand-forecasting software can help create a better inventory flow. You can fine-tune your list of best-selling products and quickly determine your inventory turnover ratio. You may even discover some areas where you’re ordering too much, and some items that are more in demand than expected. Ultimately, better inventory management leads to better cash flow management.
4. Negotiate Better Terms with Suppliers
Negotiating with vendors is an overlooked way to improve cash flow. But don’t go into the conversation looking to play hardball. Instead, the U.S. Chamber of Commerce recommends you consider what a favorable compromise might look like for both parties.
Research how current economic conditions may be affecting your vendor’s business to get a sense of what their priorities may be. Can they handle faster shipping times? Offer discounts for bulk ordering? Figure out a set of options to work with, rather than a rigorous set of demands.
5. Reduce Operating Expenses
In addition to reworking your vendor contracts, look for other ways to reduce operating expenses. Here’s a basic list to inspire your cost-cutting measures.
• Downsize office space (especially if you have remote employees)
• Bundle insurance policies
• Outsource work to free up executive time for strategy and sales
• Review (and eliminate) subscription costs
• Look for automation opportunities
• Take advantage of early payment discounts
6. Implement Digital Cash Flow Tools
You don’t have to guess at the health of your company’s cash flow. Instead, use cash flow forecasting software to find out exactly where the money is going and when. Knowing this can help you effectively plan for upcoming financing opportunities. You may even discover you want to apply for a cash flow loan.
Digital cash flow tools may help your business manage its finances more effectively during a specific period, too. You can test different scenarios to see how they would impact company financials, such as borrowing different amounts from a business line of credit.
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7. Adjust Your Pricing Strategy
Making some updates to your pricing strategy could also help you bring in cash more quickly. One option is to offer bundled services or goods: Provide a slight discount when customers make a larger upfront purchase. Alternatively, you might try dynamic pricing, in which you adjust prices based on demand. Prices go up when sales are high, then drop again when things slow down.
8. Diversify Revenue Streams
Bringing in more revenue automatically means better cash flow. Encourage your team to come up with creative ideas for generating new revenue streams.
If your business is a service provider, consider upselling clients with related services you previously didn’t offer. Or create a digital product that can augment your existing services.
For product-based businesses, consider a subscription-based option for recurring revenue. Or ramp up your email marketing with better abandoned-cart outreach, discount codes, and product recommendations.
9. Build Cash Reserves
Creating a cash flow buffer can provide an extra security net for your business. If you’re just starting to build your cash reserves, aim to accrue three to six months’ worth of expenses. Look at previous cash flow statements to figure out what that amount should be; remember to account for all of your operating expenses, including payroll, rent, vendor payments, and other bills.
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10. Prepare Strong Cash Flow Documentation
Make a cash flow statement to document the funds moving in and out of your business accounts. This is helpful for making internal decisions as well as applying for external financing.
Cash flow documentation typically covers a set period of time, such as a month, quarter, or year. It includes the following information:
• Operating activities (including depreciation, amortization, and changes in working capital, among other elements)
• Investment activities
• Financing activities
The Takeaway
Improving your cash flow sets up your business for success both in the short term and the long term. You’ll get a better sense of what aspects of your business are going well and where you might need to readjust your strategy. Plus, if you ever need lender-based financing, a strong cash flow can help you qualify for better rates and terms.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What is cash flow, and why is it important for a business?
Cash flow refers to the amount of money going into and out of a business during a certain period of time. It’s important because it’s one indicator of your company’s financial health. A strong cash flow means there is plenty of money to cover your expenses, while a weak cash flow reveals that there is little to no financial buffer.
What are the most effective ways to improve cash flow quickly?
The two most effective ways to improve cash flow fast are to speed up your accounts receivable and cut back on costs.
How can I manage cash flow during slow sales periods?
When sales are slow, consider cutting non-essential spending. You can also try renegotiating contract terms with your vendors.
What tools can help track and forecast business cash flow?
It depends on the size and complexity of your business. Microbusinesses with minimal employees can use a spreadsheet, while more complex companies may do well to invest in cash flow management software.
Should I cut expenses or increase revenue to improve cash flow?
Ideally, you would do both. Cutting expenses may be preferable as a first step, since you can take that action right away if need be. Increasing revenue is likely to take longer.
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