A Guide To Improving Small Business Cash Flow

Managing cash flow 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 cash flow, but implementing a few small business financing tips and techniques in key areas can make a significant difference.

TL; DR

To improve small business cash flow, 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 cash flow safety net to get you through inevitable quieter times.

What is cash flow?

Cash flow refers to money that comes in and out of your business. The goal in business is to be cash flow 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 cash flow crucial for a business?

Simply put, cash flow is what keeps your business alive. Having positive cash flow means you can pay for all the things that allow your business to function. A business can operate while it’s cash flow negative for a short time, but this usually doesn’t last long.

Poor cash flow 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 cash flow issues.

Growing a business requires careful attention to cash flow. 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 cash flow 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 cash flow 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 cash flow finance for small businesses comes in. Small businesses often don’t have large bank accounts to bank roll their outgoings for long, so cash flow 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 cash flow 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% in the last two years.

Eight rules for managing cash flow for your small business

So how can you actually manage cash flow 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.

Cash flow 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 cash flow 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 cash flow 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 cash flow. 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 cash flow management.

Build a cash reserve

Having money in the bank is the simplest way of avoiding cash flow issues. Even if you’re cash flow 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 cash flow 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 cash flow.

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 cash flow 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 cash flow.

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 cash flow.

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 cash flow

As we’ve mentioned above, invoice factoring, also known as invoice financing, is a flexible, affordable way of financing cash flow 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 cash flow whenever you need it.

Take home message

Understanding how to influence business cash flow 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 cash flow finance ready and waiting without costing you anything. You can improve business cash flow 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.