While sales are important, cash flow is the lifeblood of any small business.
It is vital to the success of a small business to keep money coming in regularly in order to pay salaries, buy materials, and keep the establishment up and running.
Unfortunately, many small businesses run into issues when it comes to cash flow. They find themselves being forced to slow their growth simply because they lack the proper strategies to manage their inflow and outflow of cash.
If you find yourself short on the funds necessary to run your business operations, consider the following proven methods to increase your small business cash flow.
1. Penalize late payments with interest penalties
The idea of enforcing an interest penalty for late payments works in two ways:
First, it offers the customer an incentive to pay earlier as they want to avoid the interest and ensure they don’t even come close to risking it.
Second, it penalizes them if they’re late, earning you supplemental income for the time you went without payment.
2. Institute a layaway program
Layaway used to be incredibly popular prior to use of personal credit cards — and it seems to be making a comeback.
The program allows customers to select a specific product and make payments for it over time. Typically, there is a date by when the item must be paid in full, and once paid in full it is delivered or released to the customer.
This helps ensure that you are not stuck waiting on your money, as you would be when offering credit to customers.
3. Require deposits on large or custom orders
Especially for custom orders, deposits are very important. If the order is so custom that you would have a hard time selling it to anyone else, chances are you will lose money if the customer walks away.
Therefore, it is important to get a deposit. This helps deter them from walking away and also avoids you being left empty handed.
4. Get a small business loan
Some businesses choose to improve cash flow by taking out a loan.
The benefit to a small business loan is the upfront availability of funds to be used for raw materials and other inventory while awaiting sales.
Taking out a small business loan is a great way to initiate your cash flow in the beginning stages of your business.
5. Sell or retire inventory that is obsolete or unused
Excess or obsolete inventory is simply taking up space — therefore, costing you money. If it is not being used, it is time to get rid of it.
If you are unsure if you might need it for the future, simply retire it. But, if you are pretty sure it won’t be needed again, then sell it and bring in some additional income.
6. Utilize factoring services
Typically, “factoring” involves a third-party or a non-bank finance company. The benefit to using factoring services is that the credit risk of the accounts receivable is purchased by that third party.
This factor allows small businesses to ensure consistent cash flow when needed and also allows the business to keep less cash on hand.
By using factoring services, your business can allow customers to pay with credit instead of upfront cash, without hindering your business in the meantime.
7. Deposit cash balances in interest-earning accounts
Today, most banks offer interest-earning accounts with a minimum balance requirement. On money market accounts and savings accounts, interest rates are typically higher than your regular account.
Keep the majority of your funds in one of these accounts and then transfer out as needed, ensuring you keep the minimum balance met.
Wrapping It Up
Financial flexibility is vital to the sustainability of a business. There is always the chance of the unknown happening — a good deal comes up or something goes terribly wrong. The bottom line is that you just never know when you will need a large amount of cash on hand.
Continue to build up your balances and extend your financing options to continuously increase your small business cash flow and give your business the safety net it needs.
