Most businesses experience cash flow difficulties at some stage. How do you improve the flow of cash into your business? Increasing your sales seems the obvious way to improve your cash flow, but this is only one of many possible tactics. This guide offers some ideas and a checklist at the end to help you draw up an action plan for your business.

All businesses would welcome extra cash to pay bills or to expand. This guide looks at tactics you can employ in three areas of your business to raise these extra funds.

1. Internal sources
2. Your customers
3. Your suppliers

1. Internal sources

People often overlook internal sources of cash flow improvement. Before you look anywhere else, see how much money you can release from within your own business through improved management.

Use cash flow forecasts to anticipate difficult periods and seasonal fluctuations

Good management begins with the ability to anticipate what lies ahead. Regular cash flow forecasts will show you when cash flow difficulties are likely to occur (such as seasonal dips) and will enable you to plan for shortfalls. You will also make a more favourable impression on lenders if you approach them for finance well beforehand rather than during a cash flow crisis.

Plan for your commitments

Set money aside in advance for tax obligations and also for major bill payments. Talk to your accountant or financial advisor for more on your tax commitments.

Review or renegotiate your financing options

Speak to your Small Business Specialist about different financing options. Is the structure of your financing balanced, and are you using the right kind of finance (for example, short-term versus long-term finance)? Could you make any changes to improve your cash flow position?

Reduce stock levels

You can get the quickest cash flow results from more efficient stock control - or getting rid of surplus stock. Stock is ‘money in chains,’ so look hard at your stock levels. Identify your fastest moving stock and concentrate on that. Hold a sale to free up cash by getting rid of outdated, surplus or non-core stock. The most efficient businesses are those that can turn their stock over quickest.

Consider this: if you normally carry $50,000 worth of stock and you can reduce that by 20%, you can put $10,000 into your bank account. Could you achieve this several times a year?

Increase sales (particularly cash sales)

Brainstorm the quickest way of increasing cash sales. For example, delegate a staff member to contact the top 20% of your customers who give you 80% of your business. Offer them special deals or discounts for prompt cash payments. Could you sell them additional or complementary products or services?

Reduce overheads

Pay close attention to your business expenses over a six-month period to get a feel for where the money is going. Identify what you can cut back without affecting your service levels. Ask the hard question: “Are these dollars I’m spending really earning money for my business?”

Review or defer all expenditure

If you need office furniture or equipment can you buy second hand rather than new? Do you really need a luxury car? Could you downgrade one level? Ask: “Do we need to do this now? Is it going to be productive?”

Look for extra income

Do you have excess office or warehouse space? Could you rent out part of your office or facilities to bring in more cash? Could someone hire your equipment after hours? For example, a hairdressing business rented out its central city salon at night to a person who operated it as an all-night salon.

Sell assets, rent or lease equipment

Are there any unproductive assets you could sell? Could you sell and lease back certain equipment? Should you rent or lease capital equipment instead of buying it? Ask your accountant for advice here.

Tighten systems and control staff

Keep control of your own business. Who signs cheques and makes buying decisions? Reduce opportunities for theft or fraud or simply for thoughtless spending. One businessperson found staff had ordered sufficient stationery to last for five years ‘to take advantage of a good price.’ This money could have been better spent on growing the business.

Subcontract rather than employ

Could you save money (and administrative expenses) by subcontracting certain work rather than employing someone?

Factor your invoices.

Raise money quickly by discounting your invoices to a factoring company.

2. Your customers

Raise prices

Consider raising your prices. Many businesses are afraid of this step, but it often brings very positive cash flow results.

Alternative payment methods

Get to know your important customers. Putting some effort into good customer relations can pay quick dividends when you need cash in a hurry. For example, you could ask selected customers to:

• Pay by credit card (you get the money immediately, the customer gets up to 55 days credit).
• Pay a deposit on a large order.
• Make progress payments as work is completed or goods delivered.

Make payments easier

To encourage early payment, offer your customers as many payment options as possible, including direct credit, electronic, and on-line payments.

Improve communications

Make it easier and cheaper for your customers to contact you: consider free phone and free fax services and promote your email address.

Speed up the business cycle through e-commerce

Reduce costs through e-commerce and speed up payments by emailing invoices and encouraging on-line transactions.

Create efficient systems

Work at releasing the money locked up in unpaid invoices. Efficient systems can greatly improve your cash flow. Here are some tips:

• Credit check all new customers.
• Invoice promptly, identify late payments early and follow up promptly.
• Collect money faster. If your customers take an average of 45 days to pay you, set a goal of reducing this to 30 days.
• Change your terms of payment to 7 days net rather than 20th of the month following invoice date.
• Consider cash discounts for early payment of invoices.
• Think of ways to increase cash sales and decrease credit sales.

3. Your suppliers

Strengthen your relationship with your suppliers. Establish a good track record in paying your accounts. Once you’ve gained the trust of your suppliers by paying their bills regularly, try negotiating discounts or better terms of credit. Any discount is worthwhile, so always take them. Good relationships also mean a better chance of being offered special deals.

Give ample warning of payment problems

Give your suppliers ample warning if you foresee a problem in paying a bill. Nobody likes surprises sprung on them at the last moment. The closer your relationship with suppliers the easier it generally is to negotiate payment problems. Some options:

• Can you make a part payment?
• Can you pay by credit card?
• Can you ask the supplier to take back some surplus or obsolete stock?
• Can you negotiate better prices or extended credit? (If you don’t ask, you don’t get!)
• Can you find an alternative supplier (for example, by searching on the Internet) who might offer better terms?

Case study: Leveraging off new competition

The owner of a gift shop was able to leverage new competition into lower prices and more favourable terms. As she explained to her main supplier’s sales representative:

I’m being offered some alternative products by a new supplier at very competitive rates, but I’d like to stay with you. We’ve built up a good relationship, but these new prices are tempting! What can we do to help each other here?”

The sales rep said he would get back to her after he had spoken to his sales manager. The result was a mixture of better discounts and more extended credit terms.

Just-in-time ordering

Try to make your supplier or wholesaler your warehouse and let them carry the financial burden. (But balance stock reduction against your ability to satisfy your customer’s needs quickly and completely.)

Cash flow checklist

Finally, use the cash flow checklist that follows to identify possible cash flow tactics and draw up an action list for your business.

> Discuss this topic in our discussion forum

Back to Top