Has your business ever struggled with cash flow? Cash flow challenges can take a toll not only on business operations but also on the stress levels and mental health of the owners.
According to a recent study conducted by Xero (Money Matters Report, 2023) between 71% to 87% of businesses surveyed globally experienced cash flow issues. In the U.S. 79% of small businesses surveyed experienced cash flow issues, 12% of which experienced significant challenges.
Cash flow challenges are especially stressful when it is time to run payroll, when it is time to pay vendors, or when owners must decide between paying themselves a living wage and keeping the business afloat.
While none of us can predict the future, there are steps you can take as the owner to improve your business’s cash flow today and better position your business for the uncertainties of future.
Let’s explore some ways you can improve cash flow in your business. Now!
1. Look at the Numbers
The best thing you can do for your cash flow is to look at your cash flow. You can’t expect to manage or control cash flow if you don’t watch the flow of cash.
I recommend setting some time aside each week to review your financials and ask yourself:
- How much is coming in?
- How much is going out?
- Where is it going when it goes out?
- What trends are you noticing in income or expenses?
This time may also be used to take care of other financial tasks like invoicing or bill payment. Setting this time aside keeps you in the know and prevents you from falling behind on understanding what the cash is doing.
2. Check for Money Leaks
Money leaks can be a major contributor to cash flow issues. A money leak is any cash that leaves the business that you would prefer to remain in the business. Money leaks could include forgotten subscriptions, services that need to be downgraded because you no longer use the premium level, owner distributions that are not being tracked, and even fraud.
If you have financial software, identifying money leaks is easily accomplished by running reports to show how much money is going where. I like to run a P&L (profit and loss statement) to show each type of expense as a percentage of revenue. Using this method, one can quickly identify the top 5 or 10 expenses for a business. Also, you can run reports on categories like software or marketing to see detailed spending in those areas.
If you don’t have software, you can still accomplish this task by reviewing bank statements. This method is not as efficient, but you can still uncover money leaks.
3. Check Your Pricing
If your price isn’t right, you may not be charging enough to cover current expenses and overhead. If this is the case, cash flow will suffer. Assuming you have completed step 2 above and identified all the money leaks, you know you are spending only what is needed to keep the business operating efficiently.
Increasing prices can be an extremely effective method of improving profitability and cash flow. However, pricing properly is a balancing act between profitability and the market for your product or services. A decision to increase prices should be made with an understanding of target clients and their pain points, the competition, the business’s value proposition against alternative solutions, and an understanding of your costs (of course!).
4. Watch Your AR
First, what is AR? AR refers to accounts receivable, which is the money that is owed to your business (money you will receive). If you performed a service, or provided a product and allowed the customer to pay you over time versus in full, that is a receivable.
The challenge with AR is that while it is convenient for the buyer, and may increase your chances of making the sale, AR is money you don’t yet have. The money gets to sit in your customer or client’s bank longer meaning it has a negative effect on your business’s cash flow.
Here are some ways to better manage AR and improve your business’s cash flow.
- Monitor AR Regularly
- This can be incorporated into the weekly financial review of step 1. Check AR at least monthly to see who owes you money or which clients are late in paying. Then, take action to get paid.
- Utilize Electronic Methods
- Digital payments increase the speed of cash into your business’s bank account. Digital payments move faster than paper checks. Paying digitally is also easier for clients and customers who are just as busy as you. If you make it easier to get paid, you will get paid faster.
- Automate It
- Automatic payments are another great way to ensure the business is getting paid on time. Allowing customers to set up automatic payments is a great way to make the payment process easier for customers.
- Automatic reminders save you and your staff time and lift the mental load of needing to follow up and remind customers of a payment when they forget to pay or when their credit card expires. Set those automated reminders and forget it!
- Reward Early Payments
- Consider giving a discount to those who pay in full upfront. What this looks like varies depending on your product or service, but on average businesses can charge between 5-20% more for payment plans.
5. Consider Cash Flow Forecasting
What if you had a crystal ball for your business? Cash flow forecasting is like a crystal ball in that it can help give business owners a glimpse into the effects of sudden or unexpected expenses on cash flow. Yes! No more hoping and praying things work out (okay, I do believe prayer changes things). With cash flow forecasting business owners have the ability to anticipate the effects of decisions and create a better plan forward.
If you need help deciphering your numbers, checking for money leaks, or navigating any of the above recommendations, we can help. As business solutions experts, we have helped dozens of businesses untangle complex issues and clarify a path to greater profitability. Schedule a Discovery Session.
If you’ve found this blog helpful, and you’d like some additional tips to help your business be better or to help you be better at business you must get a copy of my FREE guide to learn how to stop the money leaks in your business. It’s called Stop the Money Leaks In Your Business: The 5 Money-Related Mistakes Entrepreneurs Make and How to Fix them. In it, I share the top 5 mistakes entrepreneurs make that keep them from realizing their full profitable potential. Grab a FREE copy of the guide by going to the link above.