How to Improve Cash Flow in Your Small Business

08/05/2020 | Roger and Susie Engelau

If your business is a body, cash is it’s blood. Just as cholesterol Inspire Results Business Coachingblocks healthy blood flow, slow invoicing, lack of regular financial reports, and other things we’ll discuss here, block healthy cash flow.

The pandemic of 2020 showed a lot of us business owners how fast cash flow could dry up. A majority of small and mid-sized businesses were in hot water within 2 weeks of sales slowing or halting.

When sales and revenue go down but overhead stays the same, it’s a nightmare situation for business owners.

Success Can Bring Cash Flow Problems?!

Interestingly, among the clients in our business coaching company, we hear this:

I feel like I run a successful business. We’ve experienced good growth. Yet it seems I’m in a desperate place cash-wise.  How can I be successful yet not have enough cash?!”

Its true. Even though you’ve successfully grown your business, you can still feel the squeeze of poor cash flow.

Some Quick Ways to Improve Cash Flow

We’ve written a whitepaper called Healthy Cash Flow Healthy Business. It’s a step-by-step description of how to improve cash flow in your small to mid-size business. It contains both foundational things you need to do as well as a list of basic changes you can implement quickly. Download it for free here.

Reducing expenses and reducing the time it takes to get your money for services rendered are two ways to improve cash flow. Here are a few of the other ways to permanently strengthen your business’ cash flow from Healthy Cash Flow Healthy Business:

  1. Whether you sell water softeners or computers to legal services, require the customer to pay 50% of the quote up front. Use the deposit to pay for your upfront expenses. Then you’ve got cash to cover your costs without carrying them on your books for 30, 60, 90 days or more.
  2. Focus on the profitability of the work you do.  Create workflow systems to reduce the cost of delivering your service.  A heating/cooling company has a service guy who stops to get coffee on the way to the 1st job of the day. He arrives and makes a phone call to his daughter before knocking on the door. Next he chats with the customer an extra 10 minutes, brings one tool at a time to the work site, chats with the customer, makes another phone call, then leaves. He stops to pick up a few parts at the supply house and talks to the clerk about football, goes to the 2nd job, realizes he needs another part, leaves mid-way through the job to get the part, returns to the job, chats with the customer…all these little things add up and soon the delivery of the service has become expensive and your profitability has evaporated.  You can reduce your average labor time per call by 40 minutes. If you can decrease your average labor time per customer by just $15 and you make 20 calls a week you’ve generated additional profit of $300/wk or $15,600/yr.
  3. Minimize the money owed to you. First, invoice immediately. Next, change your terms from 30 days to “due upon receipt,” 7 days, or 14 at the most. Provide financing and/or take all credit cards. The money is always better in YOUR account.
  4. Put a good collection process in place. Get immediate alerts to past-due payments and contact the customer. Right then. Do this on a steady pattern with friendly but more aggressive language 2 or 3 times over the first 30 days.  Once you let it get past 30 days, the chance of getting paid decreases and if it gets to 90 days, the chance that you’ll ever collect it is little to none.
  5. Reward customers who pay early. For example— a 2% discount if they pay within 10 days. If you don’t want to give cash, offer a “free gift.”  People love free gifts.  Maybe it’s 30 minutes of time with a lawyer in your law firm or a bag of branded items.
  6. If your ads aren’t making money, stop running them.  Only run ads that make you money.  Test and measure every ad to make sure you’re getting a good return on investment of every marketing dollar. A veterinarian pays $695 a month for an ad in the local newspaper. The ad brings in 10 customers in the first month who each spend on average $60 with a gross profit of $25/customer. So he spent $695 to create $250 in profits. (By the way, he could stop running the ad but since he’s getting some business, he should first try changing it to see if he can get the ad to produce more business).
  7. This is so simple you’ll be in danger of rejecting it at first.  Raise your prices. Some small and mid-size business owners afraid of running off customers. Some haven’t raised their prices in years.  In all the times we’ve coached clients to do it, never once has a customer complained and left!
  8. We asked one restaurant owner what item she sold the most of. She replied, “burgers.” We asked how many she sold. “200 a week,” she said.  She’d been charging $5.95 since 2007 so we suggested for 1 month she raise the price to $6.75.  She still sold 200 burgers and the $.80 increase made an additional $640 in the 1st month and $3840 in six months. Six months later she raised the price to $7.29.  Selling 200 hamburgers/week at $1.34 more per burger over the next 6 months resulted in $6432 additional income. That’s a total of $10,272 additional income in the 1st year. Just think how much additional income she’ll make if she raises the price on 10 items, or 20, etc.

The foundation strategy to improve cash flow is making a Cash Flow Budget.

This one’ll take some time to implement but will be worth it. A Cash Flow Budget is a projection of your business’s cash inflows and outflows on a daily, weekly, or monthly basis, usually done over a 6-month period. The purpose is to predict your business’ ability to take in more cash than it pays out, giving you an indication of your ability for expansion, to pay bills, or simply to support yourself. It can predict cash flow gaps—periods when cash outflows exceed inflows—so you can take steps to ensure that the gaps are closed, or at least narrowed…steps like lowering your investment in accounts receivable or inventory, or looking to outside sources of cash, such as a short-term loan.

You can improve cash flow. It doesn’t have to be a mystery or a roller coaster of ups and downs. Like high cholesterol, it can be diagnosed, treated, and improved for the life of your business.