10 Effective Cash Flow Management Strategies For Small Businesses

23rd November 2022

Cash is the lifeblood of any business, and many small businesses struggle with maintaining a healthy cash flow. It’s why most small businesses fold because of a lack of money. 

Small businesses struggle with cash flow partly because they don’t pay adequate attention to how much money comes in and out of their coffers. On the other hand, they don’t have enough experience to forecast future income and expenditures accurately. Each situation works together to place them at high risk for cash flow struggles.  

To prevent being hit by the effects of negative cash flow, small businesses have to adopt a few cash flow management strategies. This article discusses ten effective cash flow management strategies that have worked for thousands of small businesses worldwide. You can adopt them to help you manage your cash flow.

Review Payment Terms From Your Vendors 

A tipping point for small businesses with negative cash flow is when they don’t have enough money to operate. Operating costs include paying utility bills and paying for production materials sourced from vendors. You can avoid this tipping point by renegotiating payment terms with your vendors. 

Request more favourable terms to help you manage your available cash while ensuring you don’t default on paying your bills on time. 

Request Milestone Payment or Deposit 

Suppose your business requires a considerably high cost of production. In that case, you don’t have to bear the cost and deplete your reserves. Requesting a deposit or milestone payment is a good way to ensure quality delivery without stressing your cash flow. 

Instead of draining your reserves to provide this service for a client who may eventually not pay on time, it is wiser to request a deposit that at least covers the cost of production before work. If the client doesn’t clear the invoice on time, you won’t be strapped for cash because they have already paid the cost price for the service. Alternatively, you can set up a milestone payment structure that allows clients to pay at different levels of work progress. 

Whichever option you choose, you’ll be taking off unnecessary pressure from your cash flow. 

Financing Purchase Orders 

If renegotiating payment terms with your vendors doesn’t work out, you can consider financing your purchase orders. Financing purchasing orders simply means allowing a finance company to pay for your purchase orders and then repaying the finance company according to the terms you agreed on. Why is this a great option for small businesses? 

If your manufacturing process requires a lot of capital to fund, you can keep your available cash in your reserve and opt for a financing option, so you’re never without available cash. Secondly, it allows small businesses to operate and take orders even when they don’t have enough money to finance it. Small businesses that are going through a rough patch benefit so much from financing purchase orders because they can still function instead of folding. 

Arrange Work to Maintain Steady Incoming Cash 

One of the struggles of small businesses is work irregularity, which leads to irregularity in payment which then affects cash flow. Businesses can’t control when they have work and when they don’t. While this is true, they can proactively plan to ensure they are never really out of work. 

In the booming months when it’s easy for businesses to be buried under so much work, you can postpone some of the work to your less busy periods. If you offer clients incentives to push their due date ahead, they will. Using this strategy, you would have avoided a significantly irregular cash flow. 

Request Faster Payment from Clients 

Another way to ensure your cash flow stays healthy is to ensure that clients pay on time. Adapting to new technology like credit control software helps to manage invoices and drive progress. In addition, using accounting software also offers more accounts receivable automation benefits and incentivises early payment. 

Think of discounts for early bird payments. Clients who pay within a set number of days after their invoices are due enjoy a 2% discount on their bill. With such incentives, you can be sure that a percentage of your clients would pay on time, keeping your incoming cash flow levels high. 

Reevaluate Expenses 

The first thing any business does when they are strapped for cash is to reevaluate its expenses with a fine-toothed comb. In lean times, small businesses need to take on the spartan approach with their expenses. Go through the previous cash flow statements and outline all expenses made by the company.

Next, divide all expenses into different columns depending on their urgency and importance. Cut down on expenses that aren’t necessary and find ways to handle the necessary ones. You can consider options like financing purchase orders to cut down on how much of your money you’re spending. 

Monetise All Avenues

When your business is in a tight spot, it’s time to evaluate all expenses and avenues for making money. One of the common ways small businesses add to their cash inflow column is by selling or renting out their equipment.

If your production requires the use of expensive machinery, you can offer to let another company use it for a fee. If the equipment can be moved, that’s great, but if it can’t, they might want to use it at your factory. Old but functional machinery should be sold, and the money added to incoming cash flow. 

The same strategy can also be adapted for storage units and other business property that can be monetised. 

Increase Profit Margins

The simple maths to ensuring your business has enough money is to keep cash flow incoming much higher than cash flow outgoing. In simpler terms, earn more than you spend. Small businesses haven’t been able to follow through with this formula because it isn’t as easy as it sounds. Not enough clients and irregular pay make it tough. But one way to do it is by increasing your profit margin instead of your number of clients.

If your product is well received in the market, and your customer base is growing exponentially and steadily, increasing the cost of your products is viable as long as it’s done right and doesn’t send customers away. 

Consider Invoice Factoring 

Invoice factoring simply means invoice selling. Like financing purchase orders, invoice factoring is set up to ensure small businesses have access to money when they need it without waiting for clients to pay whenever. 

How does it work? 

You sell an invoice that might be due to a company. These companies buy up invoices because they are assets. Instead of waiting until the invoice is due, you sell the invoice to these companies for the amount. Then when the client pays, the company takes their money. 

Invoice factoring is a great idea for small businesses because it releases available cash to them while also removing the burden associated with unpaid invoices. For bonus points, small business owners don’t have to handle any debt if the client doesn’t pay. 

Consider integrating InvoiceSherpa into your small business strategy, especially when exploring invoice factoring. Not only they streamlines your invoicing process but can also enhance the efficiency of invoice factoring.

Hire A Professional Finance Manager 

Small business owners must take on many roles they can’t afford to pay for to ensure their business thrives. While this is laudable, some roles should be contracted to professionals to handle. One such role is that of finance manager or accountant.

These professionals are experienced in managing the finances of businesses and can offer helpful advice and solutions. Not every small business can afford a professional; however, if you can, get one. They’d end up saving your business a lot of money.

Cash flow management is tough on every small business. Still, you can make it easier by using any of the cash flow management strategies discussed in this article.