How to improve cash flow: 20 Cash flow management strategies
For businesses, cash flow management is like breathing — vital to survival.
It doesn’t even matter if you make more money than you spend — if you don’t have the money when you need it, your business could quickly find itself dead in the water.
And if that’s not enough, cash flow management isn’t exactly straightforward. There are so many techniques, strategies, and tactics out there — which ones should you focus on? Which ones will make an impact?
In this rapid-fire guide, we’ll run through 20 top cash flow management techniques that you can use to safeguard your business and thrive.
But before we dive in, let’s quickly explore a cash flow management definition and refresh the basics.
What is cash flow management?
Cash flow management is the process of tracking, analysing, and optimising the movement of funds going in and out of your business. When a business manages its cash flow effectively, it will always have enough money to pay bills when they’re due and to invest in the company.
There are two types of cash flow:
- Positive cash flow: This is when the money coming into the business via things like sales, investments, and accounts receivable is more than the amount leaving the company in the form of vendor expenses, salaries, overheads, etc.
- Negative cash flow: This is when the cash flowing out of the business is more than the money coming in. Businesses with negative cash flow must take measures to remedy the situation immediately.
It’s important to recognise that aggressively growing sales alone won’t create positive cash flow. As the real estate investor and author Robert Kiyosaki said, “Making more money will not solve your problems if cash flow management is your problem.”
In essence, there are 4 fundamental strategies that you can use to improve cash flow:
- Increase income
- Reduce expenses
- Receive payments faster
- Make payments slower
Now, let’s explore some practical ways you can do these things.
How to manage cash flow: 20 cash flow management strategies and tactics
Here are 20 ways that you can optimise cash flow in your business:
- Keep track of your finances
- Use a cash flow management tool
- Increase your prices
- Reduce or remove inefficiencies
- Lease, don’t buy
- Sell or lease equipment
- Improve your inventory management
- Send invoices immediately
- Set shorter payment terms
- Offer discounts for early payment
- Do customer credit checks
- Ask for deposits and milestone payments
- Make payments easy
- Use a business credit card
- Improve vendor payment terms
- Form a buying cooperative
- Sell invoices
- Use high-interest savings accounts
- Invest in people and resources
- Invest in cash flow management training
Let’s explore each one in more depth.
1. Keep track of your finances
First things first: You can’t optimise cash flow if you don’t have a hold on your finances. This is why the billionaire founder of the Virgin Group, Richard Branson, said, “Never take your eyes off the cash flow because it’s the lifeblood of business.”
So, make sure that your bookkeeping is detailed and always up-to-date, and review your finances regularly. Once you thoroughly understand your business’s finances, you can start to find ways to improve cash flow.
2. Use a cash flow management tool
With just a few incoming payments and expenses, small businesses might be able to use a simple spreadsheet to manage cash flow. However, small and medium-sized enterprises will likely need a more comprehensive and flexible tool.
Thankfully, there’s plenty of cash flow management tools out there to help, such as:
- PlanGuru: This cash flow management software integrates with Excel and accounting tools Quickbooks and Xero. It provides cash flow data and forecasting to help businesses extract actionable insights.
- Float: This cash flow management tool integrates with Quickbooks, Xero, and FreeAgent to offer real-time cash flow insights. It also allows you to run scenarios to help you plan for changes and avoid costly cash flow management problems.
3. Increase your prices
Although raising your prices won’t solve every cash flow management problem, bringing in more money can help provide some additional breathing room.
It’s fair to say that many businesses are apprehensive about the idea of raising their prices for fear it could lead to reduced sales. However, the opposite can also happen. For example, John Foley, the CEO of home exercise bike brand Peloton, revealed that sales actually increased because they raised the bike’s price.
So, take some time to run A/B tests to find the optimal price point for your offering.
4. Reduce or remove inefficiencies
Reducing costs is a vital part of cash flow management. Every business has inefficiencies that can be weeded out and remedied to improve cash flow.
For example, perhaps you have wasteful overheads or subscription services that no longer provide much value.
5. Lease, don’t buy
Purchasing high-cost goods upfront can be incredibly damaging to cash flow.
So, consider spreading the cost of things like real estate, vehicles, and equipment by leasing them instead of buying them outright.
Although you may end up paying more, the benefits to your cash flow could make the additional costs worthwhile.
6. Sell or lease equipment
If you’re experiencing negative cash flow, you may want to lease or even sell any equipment, vehicles, or real estate that you’re not using to help get your business back on track.
You could even sell assets you do use and then lease them back to free up capital.
7. Improve your inventory management
When it comes to improving cash flow, it’s essential to manage your inventory effectively.
Ideally, you want to minimise the amount of capital that’s tied up in stored goods. However, this is a balancing act as you need to ensure you have enough supplies on hand to fulfil orders quickly.
Monitor your inventory closely and look for opportunities to streamline. For example, perhaps you have goods that sell slower than others, and you don’t need to hold as much inventory.
8. Send invoices immediately
Perhaps one of the simplest and most effective ways to improve cash flow management is to ensure you receive prompt payments by simply sending invoices as soon as possible.
You can also avoid wasting time on additional communication by ensuring that the details on your invoices are clear and concise. For instance, you may want to bold the due date and include step-by-step instructions on making payments.
9. Set shorter payment terms
Another way to get paid faster is to set shorter payment terms. For example, instead of offering net 60 payment terms (where the payment is due within 60 days), you could offer net 30, net 15, or even net 7 payment terms.
That said, you will need to consider whether such short payment terms are readily acceptable in your industry. Some industries require longer payment cycles by nature. In these cases, demanding payment too quickly could incentivize customers to switch to one of your competitors.
As always, try to find a balance.
10. Offer discounts for early payment
You can also get paid faster by offering discounts for early payments. Doing this creates a win-win situation: If a customer is experiencing positive cash flow, they can pay early and enjoy a discount — helping your business’s cash flow in the process.
Discounts are typically communicated with a few simple numbers at the top of an invoice. For example, say that you want to set net 30 payment terms. You could offer a 5% discount if payment is received within 14 days. To communicate this, you would write, “5/14 net 30.”
Conversely, you could also do the opposite and charge late payment fees. These fees can help mitigate the damage late payments do to cash flow.
11. Do customer credit checks
If a client has bad credit, you likely won’t receive payments on time. And generous payment terms like net 30 or net 60 are essentially a line of credit. So, before offering them to a new customer, be sure to check their credit.
What’s more, if you have an existing client that regularly pays late, consider whether keeping their business is practical. Although letting them go would reduce sales, it could also improve cash flow enough for you to invest heavily in the growth of your business.
12. Ask for deposits and milestone payments
Many companies need to make significant upfront investments to fulfil customer orders. For example, web design agencies must pay the salaries of their developers and graphic designers for weeks or months before a project is completed.
As a result, asking for deposits and milestone payments is a simple and effective way to improve cash flow. These payments allow you to reduce hefty upfront costs when fulfilling customer orders.
13. Make payments easy
The easier it is to pay you, the quicker you’re likely to get paid. For this reason, it’s worth using modern online payment gateways like Stripe and allowing customers to pay via their preferred method.
Also, if you do business internationally, multi-currency wallets like Neat are invaluable in streamlining your payment processes.
14. Use a business credit card
Another key cash flow management strategy is to delay payments as much as possible. This way, you can hold onto your cash reserves longer.
A simple way to do this is to use a business credit card to delay payments by at least one month. Just make sure to set up automatic electronic payments to go out the day the bill is due.
15. Improve vendor payment terms
You can optimise cash flow by asking vendors for more lenient payment terms. For example, if you currently have net 15 payment terms, you could ask to move to net 30.
Start by approaching vendors that you have a long-term relationship with. You’ve already established trust with these clients, so they’re more likely to accept your proposal.
16. Form a buying cooperative
Many companies offer discounts when goods or services are purchased in bulk.
Consequently, you can access significant discounts if you approach other like-minded companies, form a buying collective, and purchase goods or services in bulk together.
17. Sell invoices
If you’ve issued many invoices and are waiting to be paid a substantial sum, you might want to consider selling your invoices. This is a process called ‘invoice factoring,’ and essentially, it’s a quick form of funding available for B2B businesses.
For example, instead of waiting 60 days for a client to pay you, you can ‘sell’ the invoice to a factoring company at a discount and receive the money upfront. Then, 60 days later, the factoring company will receive the payment.
18. Use high-interest savings accounts
If you have capital that’s not being utilised effectively, you could place it in a high-yield savings account. This way, you’ll realize the highest interest rates possible while still maintaining liquidity.
19. Invest in people and resources
Investing in your business can be one of the best ways to improve cash flow. After all, by optimising your processes and increasing sales, you’ll have more money coming into the business.
To start, look for opportunities to reduce inefficiencies and improve productivity. For instance, email has long been a costly and impractical way for teams to collaborate. By implementing a business messaging solution like Slack, you’ll empower employees to perform at a higher level.
20. Invest in cash flow management training
Finally, cash flow management is a complicated topic with virtually limitless depth. So, if you want to realise every possible advantage, you’ll need to do some homework.
Final thoughts: How to manage cash flow
Cash flow management can feel like an overwhelming task at first. However, in principle, it all boils down to four key strategies:
- Increase income
- Decrease outgoings
- Get paid faster
- Delay outgoing payments
For new entrepreneurs, improving your business’s cash flow may not feel like the most exciting task, but it’s essential to success. As the management consultant, Peter Drucker once said, “Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.”