TL;DR: Cashflow management is one of the biggest challenges for small businesses. This guide covers practical strategies to improve your cashflow, including faster invoicing, better payment terms, and funding options like invoice finance.
Managing cashflow in a small business requires constant attention. Business owners are often kept awake at night wondering how they’re going to pay the bills and keep the lights on.
There’s no silver bullet to improving cashflow, but implementing a few small business financing tips and techniques in key areas can make a significant difference.
TL; DR
To improve small business cashflow, have short payment terms on invoices, send them as soon as work is complete, keep your books up to date, build up cash reserves and reduce expenses where you can. Invoice factoring also provides an excellent cashflow safety net to get you through inevitable quieter times.
What is cashflow?
Cashflow refers to money that comes in and out of your business. The goal in business is to be cashflow positive, which means having more money coming in than you have going out.
Income doesn’t only refer to the money you make from trading, though that’s often the predominant source of money coming into a business. It can also be cash from financing, owner investment, investment income or any other instance where your business gets cash coming in.
Outgoings are anything you spend money on – bills, purchasing stock, repaying debt etc..
Why is cashflow crucial for a business?
Simply put, cashflow is what keeps your business alive. Having positive cashflow means you can pay for all the things that allow your business to function. A business can operate while it’s cashflow negative for a short time, but this usually doesn’t last long.
Poor cashflow is often cited as being at least part of the reason why businesses fail. In fact, more than 80% of businesses that go under have cashflow issues.
Growing a business requires careful attention to cashflow. Businesses often need to make investments in technology, equipment, people and more in order to be able to grow, but it’s important to be mindful of cashflow as this happens.
For example, if you’re purchasing new tech, you need to make sure that you have enough money left over to pay operating expenses after you’ve bought it.
One of the big reasons cashflow is an issue in small businesses is they often go through ups and downs. Even profitable businesses have slower periods, and you need to have the cash you need to cover overheads and other outgoings in these times.
This is where cashflow finance for small businesses comes in. Small businesses often don’t have large bank accounts to bank roll their outgoings for long, so cashflow loans, credit lines, invoice finance and other methods are commonly used to navigate through to when business picks up again.
Read more: How to identify if your business needs a credit line
Likewise, these techniques can also be used to help a business grow. By taking advantage of cashflow finance, businesses can invest in key areas that help them to become bigger and more profitable.
Notably, FundTap customers have used invoice finance to fuel average turnover growth of 54% over 2 years in the last two years.
Eight rules for managing cashflow for your small business
So how can you actually manage cashflow in your small business to help you to not only stay afloat, but grow and thrive?
Keep your books accurate and up to date
Monitoring your finances makes a huge difference, both for right now and the future. Know how much money you have on hand, and how long your business could survive with your current levels of cash.
Cashflow forecasting helps you to identify likely slow periods in advance, so you can hold off making unnecessary purchases, keep cash in the bank or arrange for cashflow finance before these times come.
Don’t be too lenient with your customers
If you’re a business that invoices, it pays (literally) not to extend your customers too much rope. As in, don’t let them take too long to pay their invoices.
Invoices create cashflow issues if you have long payment terms, or if customers don’t pay them on time. When you invoice, you need to have the cash to cover your outgoings until the customer pays. The longer it takes for them to pay, the more you need to dig into your own cash reserves to cover outgoings.
Set shorter payment terms if you can, so invoices are due sooner. Also, have conversations with late paying customers to encourage them to pay on time.
Keep your accounting simple
A reliable accounting system helps you to monitor key metrics including cashflow. You need to be able to understand the numbers, and ideally the levers you can pull to influence income and expenses.
For example, knowing what expenses you can cut back on if you need to, or how much a certain marketing spend increases your revenue.
Using accounting software is a great start. Many businesses hire an accountant to help with their reporting.
Having an accountant frees up time to concentrate on other areas of running your business, and gives you the reliability you need when it comes to small business cashflow management.
Build a cash reserve
Having money in the bank is the simplest way of avoiding cashflow issues. Even if you’re cashflow negative, if you have cash on hand to cover outgoings then it’ll prevent you from getting into trouble.
Collect receivables before payables are due
Regular bills tend to be payable at the same time each month. It’ll help cashflow to pay bills the day they’re due, so you always have as much cash on hand as possible while still paying them on time.
Read more: Common invoicing mistakes to avoid
If you can, schedule invoice due dates slightly before you have to pay these bills. As long as customers pay invoices on time, you’ll have enough cash on hand to cover these outgoings.
Send invoices on the day of service
The sooner you send an invoice, the sooner it’ll be due and the sooner you’ll get paid.
If you do regular work for customers each month, then bill them on the same date each month. But for one-off customers, invoice straight away after completing the work. They’ll have the work fresh in their mind so they’ll be less likely to query aspects of the invoice. It also shows them you’re efficient with your admin and encourages them to be the same.
Streamline inventory management
Managing stock levels is one of the most crucial aspects of small business cashflow.
Purchase too much, and you’ll have money tied up in inventory for long periods. Purchase too little, and your profitability is impacted.
Streamlining inventory management means integrating ordering with your POS system to automate reorders and set alerts for stock levels. Figure out what the optimal stock levels are for different products so you have enough without carrying too much.
Use invoice factoring or short-term loans
Invoice factoring is a great revenue source for startup businesses because it’s easy to get and doesn’t involve getting into large, long term debt. It works by lending the value of your invoices, and the borrowing is repaid when customers pay their accounts.
This allows businesses to finance their growth immediately, without having to wait weeks until invoice due dates come around. It also reduces the cost of borrowing significantly, as it doesn’t require monthly repayments plus interest.
Tips to decrease cash outflow from your business
Small business cashflow management also involves reducing expenses. Expenses are often necessary to make money, but there are often things you can do to cut down spending without impacting your earning capacity.
Re-negotiate contracts and services
Look at your subscriptions and see if there are things you’re paying for without really using. If you have a long-standing relationship with the provider, you’ll have more leverage to get yourself a better deal.
You might also be able to negotiate an early payment discount, particularly if you work with suppliers who are also eager to improve business cashflow.
Form a buying collective
Small businesses are often unable to capitalise on bulk buying discounts because you simply don’t need goods in large enough amounts. However, if you can form a collective with other similar businesses, you may be able to get cheaper rates on inventory.
Some business owners may be wary of working alongside your competitors, but cooperation allows you to grow together, as well as helping your small business cashflow.
End ineffective marketing strategies
Look into your marketing metrics to understand just how much return you’re getting on different marketing efforts. Many businesses do lots of different types of marketing, and some methods will be more effective than others.
If you’re doing marketing that isn’t effective, you don’t necessarily have to cut it altogether. You may be able to improve your techniques in that area to generate more business.
Either way, optimising your marketing spend is a great way of making your marketing dollars go further.
Use invoice factoring to improve cashflow
As we’ve mentioned above, invoice factoring, also known as invoice financing, is a flexible, affordable way of financing cashflow in small businesses.
There are a range of benefits of using factoring for your business, and perhaps the most significant is how accessible it is.
Many small businesses struggle to get other forms of finance. They may not have the established credit history, or enough assets to provide collateral for other types of bank loans. Invoice factoring is a great alternative, or even complement, for other lending.
Businesses that can get a loan can also use invoice factoring to reduce the amount of borrowing they need from the bank. This helps to limit the amount of debt you get into, and makes debt more affordable by enabling you to pay it back faster.
The flexibility of invoice factoring through FundTap is also a big advantage for small businesses. There’s no cost if you don’t use it, which means you can set up an account for free and have it sitting there ready to boost your cashflow whenever you need it.
Take home message
Understanding how to influence business cashflow is critical for the inevitable slower periods in business. Ideally, you’ll be able to plan for a rainy day, identify it in advance and have interventions available when they’re needed – whether that’s money in the bank or accessible finance.
Invoice factoring with FundTap is a fantastic safety net in these instances. Other invoice factoring providers require businesses to use them for every invoice, which makes them more expensive to use. They also often come with regular account or admin fees.
FundTap’s flexibility means you have approved cashflow finance ready and waiting without costing you anything. You can improve business cashflow at the click of a button, and have the finance in your account that same day..
Find out more about how FundTap works, or check out a free demo today.
Related Resources
Frequently Asked Questions
What causes cashflow problems?
The most common cause is timing, the gap between earning money and receiving it. For B2B businesses, this means waiting 30-90 days for customers to pay.
How can I improve cashflow quickly?
Invoice promptly, shorten payment terms, follow up on overdue invoices, and consider invoice finance to access funds before customers pay.
Can invoice finance help with cashflow?
Yes. FundTap provides on-demand invoice finance with no lock-in contracts and fees from 4%. Select an invoice and get funded within hours.
