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Cash flow is a critical metric in business management. However, it is not the same as profit or loss. It simply shows the movement of cash in the company. When a customer makes a payment for goods, cash flows into the business. When the company pays salaries or outstanding bills, cash flows out. Investment or finance obtained by the company also creates incoming cash flow. A positive cash flow indicates a surplus of incoming cash over outgoing and vice-versa. Cash flow can be categorized into operating, investing, and financing cash flow. All these three aspects of cash flow are equally important. Here’s how you can improve cash flow to keep your business healthy.
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When investors study a company, they look into the company's cash flow to determine its financial health. So, increasing and sustaining the company’s cash flow is very important. There are many ways to increase cash flow in a business. Be creative and use the ideas below and tailor them for your company’s unique business needs.
Some of the most common ones are as follows:
You have to reduce spending when you have more cash flowing out than coming in. Objectively list and reconsider your company’s spending patterns. If your utility bills are high, try to reduce usage with practical measures and ways to increase cash flow in a business. Consider shopping around for a provider who has a more reasonable cost. Consider switching from physical copies of journals and newspapers to digital versions. Shop around for lower prices insurance and other service providers.
How people and companies do business today has radically changed. The big glamorous office is not always a necessity. If most of your employees prefer to work from home, consider if you really need a large office space in an expensive part of town. You could switch the entire operation to work from home or move to a cheaper and smaller office. This could also be an option if you have few walk-in customers and more people approaching you online or by phone.
Your company may also be wasting money in other areas of operations. Save on postage, printing costs, and paper by switching to digital communication. Send invoices and bills by email rather than post. Try to also curtail the smaller wasteful expenses in the company. Small items add up to a larger amount when repeated over months.
When you think about how to improve cash flow problems, adding more revenue is an answer. If you have reached a plateau in your sales figures, you may need to add more services or products. Brainstorm with your sales team and try to add more to what you offer clients. Look to your competitors for inspiration. If there is any additional value that you can add to existing services, do so. They may be smaller add ons, but they can add to your cash flow with volume.
Late customer payments strain the cash flows of a company. Customers like it when you give them a credit line and allow them to pay within a set period. But, when you are tight on cash, it can be difficult to wait. Revoking credit may lose customers. Instead, offer customers incentives for early payment. Customers will be happy to pay earlier when early payments are more attractive. This will boost your cash flow with immediate results. Digital payments are much faster than traditional ones. If you offer customers the option of various digital payments, you can collect your money faster. The incidental charges may also be lower than other payments. Also, improve your accounts receivable process to collect all your payments on time. Use software to manage your receivables well.
Over enthusiastic buying can sometimes result in unused or unsold items on inventory shelves. Instead of locking money into inventory items, try a just-in-time method of buying inventory. Use the data in your inventory management systems to determine inventory demand trends. You can stock items more intelligently and keep more cash in hand than invested in inventory. You can also consider liquidating your inventory to generate cash. When stocked for a long time, some items will expire or become unsaleable over time. Put these items on a discount or clearance sale and get them off the shelves. You can also donate these items if they can get your company tax benefits (depending on the local tax regulations).
Raising prices may seem like a difficult thing to do. But, if you cannot sustain your cash flows at the existing rates, raising your rates may be the best option to keep yourself in business. Study the competition and determine how much raising prices will impact your business. You can raise prices with confidence if you have customers who will stay with you despite a slight price change. This decision should be made after carefully considering your industry, market, and competition. Higher rates make your business operations more sustainable without taking on debt and the burden of repayment.
If you offer a product or service that the customer pays for every month or quarter, try to offer benefits for advance payment. For example, convert a monthly payment scheme into an annual subscription that the customer pays upfront. This boosts your cash flow by immediately giving you a year’s worth of money. When the prices are more attractive for prepayment, customers will also get a good deal. This is a great option for a company that needs an immediate cash boost to tide over a large expense. The downside will be that the cash flow for the coming months may be less because of the advance payment. However, it gives the company immediate interest-free cash with no debt burden. It may also make the offer look more attractive than the competitors' offerings.
Approaching a bank or financial institution is a good way to infuse money into a struggling business. If you see that the cash flow in your business is low, do not wait for a crisis to apply for a line of credit. Apply for credit well in time to tide over the processing time. Your company will also look more attractive to a financial institution if you do not wait till the situation is dire. An infusion of cash into the business may be exactly what you need to pay dues and expand your capabilities. Try and negotiate payment terms and interest rates that will give your business the time it needs to recover. Shop around to find the lender with the most favorable terms.
Carrying business debt can sometimes be overwhelming. Paying lenders may eat into the entire cash flow of the company and leave no money in hand for business operations. Banks and financial institutions offer more lenient repayment terms when issues affect the entire business market, such as the pandemic. Instead of carrying the entire burden of the debt, renegotiate with lenders for lower interest or more delayed payment terms. This may give your business more cash to use for other purposes.
Sell equipment you’re not using
It may be tempting to hang on to older equipment just if you need it or because you may not get it at such a good price again. But, if you are struggling for cash, selling older equipment will give you the cash you need for daily operations. It may also free up more space in the office for other purposes. If you cannot sell it, you can consider leasing it out to another company to generate funds. Advertise on websites that sell used equipment for the best results.
Use these ways to increase cash flow in a business and tide over any stressful pressures that the business faces.
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