6 Ways Small Business Owners Can Increase Their Cash Flow

December 22, 2021

Cash flow is the lifeblood of any business, whatever its size. But small businesses have much more to lose to cash flow inefficiencies. Persistent cash flow problems are the primary reason many small businesses fail to thrive — or survive.

Proper cash flow management begins with a solid understanding of what cash flow is and isn’t. Although revenue, income (net and gross), and profit are all related concepts, cash flow is a metric that provides a more holistic view of a company’s financial health.

Cash flow refers to the total amount of cash moving in and out of your business at any given time. These inflows and outflows can take several forms:

  • Receipts from sales of products and services.
  • Payments (to employees; to landlords; to suppliers; to creditors; to tax authorities; etc.)
  • Purchases and sales of valuable assets, such as essential equipment.
  • Returns on investments (e.g., interest earned).

In other words, cash flow is a measurement of your business’s liquidity — its ability to meet its day-to-day expenses and other financial obligations.

If your cash flow is positive, it means you’re adding to your company’s liquid reserves. If your cash flow is negative, it means you’re depleting those reserves.

However, negative cash flow isn’t always a bad thing. In fact, most businesses experience negative cash flow from time to time, especially if there’s a seasonal component to their operations. The challenge you face as a small business owner is to have more positive months than negative ones.

With these basic facts in mind, read on to learn about six steps you can take to increase your company’s cash flow.

  1. Make it as easy as possible for your customers to pay you.

Small businesses are no longer limited to accepting only cash, checks, and credit cards. Customers can now purchase goods and services using peer-to-peer (P2P) applications and digital wallets.

More to the point, customers now expect merchants to offer multiple payment options. Not offering them can translate into lost business. Offering them can lead to more business and more satisfied customers.

Before you make a major investment in hardware and software, however, identify the points of friction within your checkout process. Then review the available solutions. You will likely need to implement some mix of the following.

  • Smart terminals accept every type of credit and debit card: EVM chip cards, magnetic strip cards, and “tap and pay” cards.
  • Mobile processing systems enable you and your clientele to make contactless payments using your smartphones.
  • Point of sale (POS) systems can automate, personalize, and speed up transactions. POS systems that integrate with your existing back-office software can also provide you with important data and insights into the efficiency of your operations.
  • Virtual terminals allow you to set up recurrent billing using a single website portal.
  • A virtual storefront and payment gateway lets you sell your goods and services online, effectively expanding your footprint without the addition of square footage.

Finally, once you’ve decided to roll out your new payment options, make sure you communicate these changes to your customers. Ask for their feedback, too. These conversations can help you continue to refine and improve the overall customer experience.

  1. Automate your invoicing to shorten your cash cycle.

What if, instead of spending time entering data into spreadsheets, using those spreadsheets to populate invoices, then printing and mailing those invoices, you could automatically generate these documents, send them electronically, and allow your customers to remit electronically as well? By pairing automated invoicing processes with Automated Clearing House (ACH) collections, you can.

Among its advantages, automated invoicing helps you get paid faster and keep your books more consistently accurate and up-to-date. Automated invoicing also saves you both time and money. According to one study, labor costs can represent more than half of all management costs associated with accounts receivable.

If you’re not quite ready to handle all your invoicing electronically, or your business still processes a high volume of paper checks, lockbox services may be an attractive option. A lockbox is a secure holding location — typically, a dedicated post office box — where customers can mail or drop off payments. Your bank will then check this location daily (or, if you prefer, several times per day), collecting and depositing all payments received to whichever account you’ve designated for that purpose. In other words, a lockbox service offers both you and your customers convenience as well as valuable peace of mind.

  1. Implement payment incentives.

We all love an incentive, especially if the reward outweighs the risk. Consider offering a discount to customers who pay their bills ahead of time. Doing so creates a win-win situation: your customers save money, and their early payment helps you maintain a steadier cash flow. (The same is true of staggering your invoice due dates.)

Subscription services are another way to keep your cash flow from experiencing frequent ups and downs. Give your customers the option of signing up for recurring deliveries, allowing them to pay a set price on a quarterly, monthly, or even biweekly basis. Again, the outcome is a win-win: regular, consistent payments ensure a healthy inflow of cash, and your customers can “set and forget” with the knowledge that they will never run out of the products they rely upon your business to supply.

  1. Secure — and strategically borrow against — a business line of credit

A business line of credit (LOC) is a revolving loan that allows access to a fixed amount of capital.

A LOC is a great resource to fall back on if you encounter a cash crunch. The money is there as a ready reserve to be used when needed. You don’t pay any interest on the principal until you use it, and you only pay interest on the specific amount of cash you borrow.

With those terms and conditions in mind, remember: the best time to apply for a line of credit is before you absolutely need it.

  1. Optimize your payroll schedule.

Do you issue paychecks every month, twice a month, every two weeks, or every week? Doing some simple math can help you implement some equally simple fixes and build more efficiency into your payroll schedule.

Consider the subtle difference between biweekly and bimonthly (sometimes called semimonthly) payroll. If a business follows a biweekly schedule, it pays its employees on the same day every other week, typically a Friday. Businesses that stick to a bimonthly schedule issue paychecks twice a month. Typically, those pay dates are separated by 15 calendar (not business) days.

From a small business owner’s perspective, the most significant difference between a biweekly and bi-monthly schedule is how often each requires them to run payroll. A bimonthly schedule results in 24 pay periods per year. A biweekly schedule results in two months out of the year in which businesses must issue an additional round of paychecks — or 26 pay periods per year.

Eliminating those extra two pay periods can improve your cash flow in several ways.

  • You can cut your overall payroll costs, especially if your payroll provider charges you for each payroll run.
  • You no longer have to prepare for months in which your payroll expenditures increase by 50 percent dues to a third paycheck.
  • Most benefits, including health insurance and retirement plans, adhere to a 30-day cycle. A bimonthly schedule simplifies the process of calculating these payroll deductions.
  • Because each bimonthly paycheck will be made out for the same amount each pay period, you can spend less time reconciling accounts at the end of each month.
  1. Anticipate and plan for your future needs.

Thinking long-term about your cash flow can pay significant dividends. Consider adopting a business plan that focuses on maximizing inflows and minimizing outflows. The solid pillars of just such a business plan include:

  • Consolidating your business debt. By doing so, you may be able to negotiate a lower interest rate or extend payment terms.
  • Selling unused business equipment.
  • Getting rid of excess inventory. Unsold inventory takes up precious shelf and floor space. Have a clearance sale and sell this merchandise both in-store and online. If it doesn’t sell, contact a liquidator.
  • Leasing rather than buying new equipment. A lease agreement allows you to pay for the latest, most up-to-date equipment in small increments. Furthermore, just as an outright purchase is a qualified business expense, so are lease payments, making them tax-deductible.
  • Strengthen your protection against potential fraud. Look for a comprehensive solution that prevents suspicious transactions from being approved without your review and offers refunds on fraudulent charges within a matter of a few business days.

Small businesses face no shortage of opportunities to increase their cash flow. But that doesn’t mean you have to try and do it all on your own. At Guaranty Bank & Trust, we’ve been helping small businesses power the Texas economy for more than 100 years. In that time, we’ve developed a full array of services designed to make your cash management processes as cost-efficient as possible. To learn more about how we successfully partner with our business banking customers, visit any of our 31 convenient locations or book a video appointment today. We look forward to getting to know more about you and how you’d like to see your business grow.

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