Cash flow is the lifeblood of any business. When it's good, operations can run smoothly. However, when there are cash flow struggles, the challenges can seem endless.
You're not alone if you've been stressed about cash flow. In a study from Intuit, “The State of Small Business Cash Flow,” 69% of small business owners reported that it keeps them up at night.
But it doesn't have to be this way. Big and small changes can help improve business cash flow and help you sleep better.
How to increase your cash flow
Cash flow has two aspects: cash inflow, which is money entering your business, and cash outflow, which is money leaving. Consider both sides to improve cash flow management for your small business. Optimize operational efficiency and reduce unnecessary expenses.
Another key cash flow component is timing. If you can time cash inflows before cash outflows, you create a sustainable cycle of generating the cash you need before it's needed.
Use a cash flow budget to break down the ins and outs of money in your business and implement a plan. The structure helps you understand what's necessary to maintain a healthy cash flow.
With that in mind, let's look at the top 14 ways to increase cash flow.
14 ways to increase cash flow
1. Increase prices
Check the competition's pricing. Are your prices in the same range? There could be room to strategically raise prices, which is especially common when businesses are dealing with high inflation.
Test your assumptions. Depending on who you sell to and what you sell to, you can charge more without losing customers.
2. Minimize accounts payable: Cut unnecessary spending
Critically review your expense history to identify what can be cut down on. Consider these 3 aspects of your spending and how you can optimize them.
Reduce operating expenses
Operating expenses are costs associated with providing goods or services. Examples include labor, materials, and equipment used in manufacturing.
By reducing operating expenses, you don't need to rely on growth, which can be important when managing cash flow during economic uncertainty. Look at the direct costs of goods sold or costs of service. Research alternative suppliers or contact your current supplier to see what it takes to reduce unit costs.
Improving efficiency might reduce costs. For example, a new piece of equipment or software might lessen the unit labor costs of production, meaning fewer costs to fulfill a sale.
Lease instead of buy
If you're in the market for new equipment, technology, or a company vehicle, consider leasing it instead of purchasing it outright. When buying, maintenance costs fall on the owner. A hefty repair bill could unexpectedly disrupt cash flow if something breaks.
If you can find a lease where repairs are the responsibility of the company you're leasing from, you can rest assured that these unexpected costs won't affect you. Additionally, by leasing, you may be able to get the most up-to-date versions of something without outlaying a lot of cash upfront or worrying about repair costs. Just be careful to run the numbers and be aware of financing costs.
Reduce inventory
Are you a retailer or wholesaler with extra inventory? Don't store it or let it take up valuable floor space. Have a clearance sale.
You can donate leftover merchandise to a charity or other nonprofit as a last-ditch effort. You won't earn money, but check with your accountant to see if you can get a tax write-off.
If you often find yourself with excess inventory, consider smaller orders. This could mean smaller payments, which are easier to plan for and work around.
3. Negotiate better payment terms
As a customer, you have room to negotiate your prices and how they're being paid. Reach out to your vendors and see if they're willing to offer:
- Early payment discounts to reduce your overall bill
- Longer payment terms if you send a deposit upon receiving the invoice
- Financing for invoice amounts that spread out payments
- Switching to an annual contract or a monthly "subscription" pricing
Each option gives you control over how much you're paying and when it's being paid.
4. Invoice accurately
Invoice mistakes affect how much you're paid, when you're paid, and sometimes, whether you get paid altogether.
If your customers receive an incorrect invoice, they might only notice when it's time to pay. At this point, they'll dispute the invoice, which would need to be redone, submitted, and restarted.
If you were depending on that invoice payment to cover an upcoming bill, you'd be on the hook for something you don't have the money for, and you might incur late payment penalties or turn to financing to cover the expense.
If you accidentally bill for less than agreed, your customer might not mention it and pay you less than you're owed.
To avoid these mistakes, set up an invoicing solution that uses matching to verify amounts by matching invoices to purchase orders (we can help with that).
4. Collect receivables
The goal with invoicing should be to make the billing and collection process as quick and smooth as possible.
The first thing you should look at is how you're invoicing clients. Are you still delivering physical invoices rather than electronic ones? Are you manually drafting invoices? Get critical about your processes and where you can improve them.
You want invoicing to be a minimal lift so you can bill as soon as possible. If invoicing is work-intensive, finding the time to sit down and finish the work is more challenging. Each day that passes is another day that you can't get paid.
Billing the customer efficiently
Electronic invoicing platforms improve the process of completing and delivering in just a few clicks. Use purchase orders to draft the details, which can be automatically imported into an invoice as soon as approved.
Send invoices electronically when possible. Physical invoices sent by mail take time to reach your customer. If there's a mistake, that lengthy process gets reset when you send an adjusted invoice.
5. Send invoice reminders
If you spend too much time looking at an accounts receivables aging report thinking about the money you're owed, this one is for you.
Late payments can happen for innocent reasons. Sometimes all it takes to get a payment is a light reminder.
Sending an invoice reminder can be automated. Accounts receivable software often offers automated payment reminders, so any follow-up once an invoice is sent is automatic.
This simple change will help you get paid faster and boost your cash flow with minimal work.
6. Offer early payment discounts
How do you motivate customers who routinely wait until the last day to pay an invoice? You incentivize them with savings.
Early payment discounts are a common tactic businesses use to get paid faster. The discount doesn't need to be massive to spur action.
When it comes to structuring early payment discounts, there are some best practices to keep in mind:
- Start small. If you start with a big discount, customers might be upset if you roll it back. Instead, start with something small, like 2% if paid within 10 days, and monitor results before increasing it.
- Use a tiered system. Have different discounts for payments on different timelines. For example, you could offer a 5% discount if paid within 10 days, 3% within 20 days, and 2% within 10 days.
- Measure results. Track your accounts receivables turnaround times and how much discounts cost you. You could check the results and find that the trade-off is worth it.
7. Penalize late payments
On the flip side of early payments are late payments. Just as you use financial incentives to make payments come through faster, you can use financial incentives to dissuade late payments.
The late payment fee could be a flat amount or based on a percentage. Flat amounts put a greater sense of urgency on invoices with low quantities. For example, a $100 late payment fee hits harder on a $100 invoice than a $1,000 invoice. Percentage-based penalties mean the more an invoice is worth, the greater the penalty.
When choosing a penalty structure, consider your typical invoices and your goals. Do you have small amounts your customers routinely forget about or large amounts that take too long to reach your bank account?
Remember to include these penalties in your terms of engagement. Notify customers you have a relationship with about the change.
8. Offer electronic payment options
Electronic payments offer two key benefits.
Electronic payments are convenient. They often require less work to process, which makes it easier for finance teams to make a payment. The easier it is to make a payment, the more likely it is to be done quickly.
On your side, electronic payments can be deposited into your account as quickly as the same day. For example, ACH payments offer same-day options; otherwise, they take 1 to 3 business days to clear.
In both cases, the money is in your account and ready to be used faster than other payment options.
Take it one step further by switching to an automated payment system like BILL, which saves you time and money. BILL's clients reduce late payments and get paid 2x faster by leveraging digital invoices, automatic reminders, and electronic payments.
9. Secure loans
When cash flow feels particularly tight, a business loan can act as a bridge to help you through.
When applying for a loan, it's best practice to plan how to use it. Devise what expenses it'll cover and what you'll do with any surplus.
What's left over can be put in a savings account as a rainy-day fund. The interest earned on that amount would help offset the loan's interest expense.
Finding and applying for a loan can be a lengthy process. It's not a great option for short-term needs, but the injection of capital creates a buffer that makes any ebbs and flows in cash flow more manageable.
10. Apply for a line of credit
Business lines of credit are great to fall back on if you encounter a cash flow crunch.
A loan is an immediate injection of capital once you're approved, but a line of credit lets you take what you need when needed. You only pay for the amount you use.
This makes a line of credit a last-line defense for cash flow shortages. If you need funding, it's available without a lengthy application process or the risk of being denied.
The downside is that lines of credit typically have higher interest rates. While you benefit from the flexibility, it comes at a cost.
Since you don't pay anything until you use the money the best time to apply for a line of credit is before you need working capital.
Loans and lines of credit aren't the only credit that could help improve cash flow. Corporate cards can be used to maximize cash flow.
11. Factoring or invoice financing
If you need a quick, short-term cash infusion, consider factoring or invoice financing.
Factoring involves selling outstanding accounts receivables to a collections agency. The agency either pays you upfront for the outstanding amount or pays you when the amount is collected.
Factoring costs are high, especially if you are being paid upfront. Doing this has advantages and disadvantages, so check with your accountant to make sure it makes sense for your business.
12. Use cash flow forecasting
The best way to avoid a cash flow shortage is to know when it's coming. Cash flow forecasting shows how things are trending, so you get a warning before a disruption.
By identifying potential shortages before they happen, you can start developing a plan for handling them.
Some of the strategies mentioned here take time to implement. Once you have a timeline for an expected shortage, you'll understand what strategy makes the most sense for your unique situation.
13. Automate cash flow monitoring
Generating cash flow statements and forecasting cash flow manually takes time. You'll likely set up a weekly or monthly cadence for doing it.
But by the time you complete the forecast, you're closer to the cash flow shortage than when it could have initially been caught. This is where automation comes in.
By automating cash flow monitoring, you get perfect visibility into your past to measure and understand performance while getting a preview of the future you can plan around.
This makes identifying high-risk situations or poor cash flow optimization happen quicker, giving you the longest runway to prepare.
Boost cash flow with BILL Cash Flow Forecasting
Effective cash flow forecasting is the cornerstone of maintaining a strong financial foundation for businesses. By accurately predicting cash inflows and outflows, businesses can proactively manage their finances, avoid cash flow shortages, and make informed decisions to drive growth.
Learn how BILL Cash Flow Forecasting gives you valuable tools and insights to optimize cash flow management—helping you ensure long-term financial health and stability.
Increasing cash flow FAQ
What does increased cash flow mean?
Increased cash flow means greater net cash flow once cash inflows and outflows are accounted for.
A key component of increased cash flow is controlling when inflows and outflows occur.
For example, if you want to increase your cash flow in February, you could defer paying for expenses to March. This won't affect your cash flow when looking at the quarter or year, but increases your cash flow in the period of interest.
Increasing cash flow is just as much about managing the when of inflows and outflows as it is about managing the how much.
What increases cash in cash flow?
Cash flow can be increased by boosting cash inflows or decreasing cash outflows.
For example, if you need to increase cash flow by $10,000 monthly, you can generate an additional $10,000 in cash inflows or decrease cash outflows by $10,000.
A solid approach to managing cash flow considers both.
How to increase cash flow from operating activities
Cash flow from operating activities refers to the cash flow tied to your day-to-day business activities.
To increase cash flow from operating activities, start by examining your operating costs. You may find opportunities to cut costs while maintaining the same output.
There could also be ways to scale your sales revenue efficiently. A new marketing initiative or paid advertising could increase sales while still being a net positive for your cash flow.
Also, look for ways to increase efficiency. If you can reduce the labor required to complete one sale, you increase your margin on every purchase, increasing the net effect on your cash flow.