Cash flow refers to how actual liquid cash moves in and out of a business's key accounts, independent of the business's overall value or its assets.
Improper cash flow management can cause a business to miss payroll or leave it unable to purchase critical inventory. Proper management allows a business to sustain itself and ideally maximize its available cash for growth.
Here are eight ways to improve cash flow:
1. Automate or Delegate Invoicing
While key to receiving payment quickly, sending invoicing out immediately can be challenging with a full schedule. Invoicing software can automate the process, making sending timely invoices easy while reducing payment turnaround times. Alternatively, delegate the task to a team member who can make it a consistent top priority.
2. Reduce Inventory
Is the firm carrying more inventory than it needs? Take a critical look at the average inventory period as well as supply chain lead times. Is there an opportunity to reduce how long your product sits on the shelf? If done well, strategic planning in this area can open up significant amounts of cash without impacting sales.
3. Shorten the Payroll Cycle
Paying employees every two weeks means you will make smaller payments, ensuring you have more cash after each payment than if you had made a more significant monthly distribution.
4. Schedule Out Bill Payments
When done manually, it makes sense to pay all your bills at once to avoid late payments or missed deadlines and to keep things efficient. Scheduling payments so that they are paid on time, but still taking advantage of the payment terms allows you to maximize your cash hand throughout the month. Software like Bill.com makes scheduling easy.
5. Pursue a Line of Credit
In a cash flow crunch, last-minute financing options can be stressful, costly and limit growth down the line. Before a cash crunch happens, invest the time to secure a line of credit, allowing you to access capital when needed at a more competitive interest rate.
6. Maintain A Cash Reserve
Unexpected expenses can reduce your cash on hand. Develop an emergency fund that allows you to respond quickly to new needs and opportunities and prevents you from taking from your operating budget or savings account.
Generally, it’s best to have three to six months’ worth of expenses in your cash reserve.
7. Consistently Evaluate Business Expenses
Reducing operating costs is one of the more straightforward, though not always easy, ways to improve cash flow.
What is and is not critical for a business’s health and growth is usually obvious to managers if they are taking the time to review expenses. A scheduled monthly review of your financial statements will give you consistent visibility into how the business is spending money and where it may be able to cut back.
8. Outsource Your Business Finances
Outsourcing your financial processes allows for greater focus on high-level financial management because the foundation is taken care of. A professional accounting service can deliver a clear, transparent analysis of your financial health and give you confidence that you are optimizing each accounting system for maximum cash flow.