Improve the Cash Flow of your Business

Cash flow problems can occur to businesses new and old alike.  The source of this problem usually stems from three areas: high accounts receivables, low profit margins, and a lack of adequate cash reserves.  Here are three proven strategies for improving cash flow.

1. Reduce Accounts Receivables
Industries among the highest in account receivables and late payments are: printing services, law firms, accounting services, commercial contractors, repair services, and wholesale suppliers.  Establishing or increasing lines of credit from suppliers can be an effective first step to maintaining cash.  This can help companies keep cash in the bank until payments are collected.  Sending invoices out immediately and using electronic payments can also speed up how quickly a business gets paid.  Storing a client’s payment of choice in a PCI complaint digital vault can also help business owners to manage collections on their own terms.  Automatic bill payments can be scheduled on a predetermined date.  Similarly, digital emails requesting payments from customers along with reminder emails can be automatically generated and sent to customers until payments are made.  

2. Increase Profit Margins
An often-overlooked reason for cash flow problems are low profit margins.  This can occur within any industry type if operations become inefficient, or if fixed overhead costs become too high.  Management software can help to determine where inefficiencies are occurring within operations.  Similarly, point of sale software can pinpoint where overstaffing is occurring on the schedule in comparison to actual sales.  Both types of software can help to identify and forecast problem areas for more efficient operations.  Maintaining an effective pricing strategy can also help a company protect its profits.  As of June 2023, the inflation rate for the United States is 4.05%.  Not keeping up with inflation will ultimately eat into profit margins.  Do not forgo increasing your prices to, at the very least, keep up with inflation.

3. Increase Cash Reserves
A study from the JPMorgan Chase Institute found that half of all small businesses have only enough cash to support 27 days of their usual outflows.  The study also reports that more than 25 percent of businesses have fewer than 13 cash buffer days.  Most experts agree this is not enough and identify a cash buffer of three months’ worth of operating expenses as the minimum amount of cash that a business should have at all times.  A small business loan can help provide the adequate buffer until profitability stabilizes.  Having a plan in place to have the proper amount of cash reserves can prevent future cash deficiencies.  We recommend the following strategy for maintaining healthy cash flow: open two additional bank accounts.  One account will be allocated for taxes and the other account will be allocated for owner profit.  Fifty percent of profit can be allocated to owners’ profit, thirty percent towards taxes with the remaining twenty percent staying in the main bank account to fund future growth and maintain an adequate cash cushion.