Every small business owner knows that cash flow is the lifeblood of a company. A business with consistent cash flow is one that can invest in itself and grow.
But not all businesses have the luxury of a never-ending cash flow. Many don’t have any cash inflow at all, and the ones that do usually have either a drag or a pull on liquidity. A drag on liquidity occurs when business’s customers take a long time to pay. A pull on liquidity happens when a business is forced to make vendor payments faster than it would like.
Even if a company has a consistent inflow of cash, if the cash comes in too slow or if the cash leaving the business goes out too fast, it can cause disastrous problems.
This means that cash flow can always be an issue, even when your company is cash flow positive.
Your cash flow equals the monthly cash received by your company minus the monthly cash paid out by your company. Therefore, increasing your cash inflow or minimizing your cash outflow increases your overall cash flow.
To help, we’ve outlined five ways a small business can increase their cash inflows and decreases their cash outflows:
1. Use interest-bearing business accounts
This one is tough if you’re having cash flow problems, but it is also an easy decision. Some business banking accounts, such as high-yield checking and savings accounts, offer interest in return for a consistent balance.
So, if you have any money at all in your business bank accounts, it’s time to switch over to accounts that offer interest. This way, even if you only have the money for one day, you’ll receive some interest earnings from your bank.
Usually, the interest rate is continuous at 0.25 percent or less. As your bank account begins to grow, though, you can take advantage of compounding interest and earn increasingly more money in the long-term.
2. Require “up fronts” for large orders
One issue that small businesses have is that they sign large deals and then wait months for payment. The books show a great cash flow because you are owed money, but the cash isn’t in your bank account, which could be a problem.
For example, if you sign a $10,000 deal with a client on net-30 payment terms and your customer takes three months to pay, you’ve effectively waited four months for the $10,000 amount. During this time, your business might become insolvent.
To combat this, require that half of the overall deal is paid up front. This way, in the example above, you can bolster your cash flow with $5,000 and then receive an additional $5,000 upon completion and delivery of the good or service.
3. Structure contracts for periodic payments
A good way to mitigate your pull on liquidity is to pay your vendors periodically. For example, if you’re working with a construction company for a new office space, you can draft a contract that calls for payments due upon the completion of specific milestones.
So, you could pay 15 percent when the plans are finished, 35 percent when the materials are delivered to the site, 40 percent based on construction milestones and the remaining 10 percent upon complete inspection.
This is better than having to pay for a project up front because it helps you manage your cash outflows by creating an environment where you still receive more monthly cash than you pay out.
4. Lines of Credit
If your business needs positive cash flow quickly, you can go right to the source and request a line of credit from your bank.
A line of credit is a loan given by banks, usually backed by some collateral. The most common types are an accounts receivable line of credit or an inventory line of credit.
If you have a lot of accounts receivables, but you’re waiting on the cash, you can put up your invoices as collateral and receive cash from your bank as a loan. The same goes for inventory. If you have a lot of inventory on hand but need to invest in distribution channels to sell the inventory, you can put up your inventory value as collateral for cash.
Just remember that all lines of credit carry an interest rate that you’ll have to pay on the money borrowed.
5. Offer discounts for early payments
If a drag on liquidity is your issue, try to offer discounts for early payments. This will entice your customers and clients to pay early so you have the benefit of consistent cash flow.
Giving 10 percent off for payment upon delivery of invoice is a great way to increase your cash inflows.