5 Tips for Improving Cash Flow

In any business, the lag between the time you have to pay your suppliers and employees and the time you collect from your clients is a problem. The solution is cash flow management, which means delaying outlays of cash for as long as you can while encouraging those who owe you money to pay it as quickly as possible. These five tips can help you better manage your cash flow.

1. Analyze your cash flow. The first step is to do a deep dive of your cash flow—where it currently stands and where it is likely to go in the future. A rolling 12-month forecast should work well for most companies. You’ll need to collect information about how much cash—in the form of payments, interest earnings, service fees and other sources—you expect to get in and when. Same goes for the amounts and dates of upcoming cash outlays, including rent, inventory, salaries and wages, taxes, benefits, utilities, office supplies, etc. An accurate cash flow projection can alert you to any issues before they arise. You can watch a video about forecasting cash flow here or find a template to get you started.
2. Make payments with a credit or purchasing card and accept card payments. With a check, you only get a day or two of float, which is the time between when someone deposits your check and when the amount is removed from your account. But if you pay with a credit card or purchasing card, your vendor gets paid and you don’t have to pay the bill for several more weeks. Be careful not to charge more than you can pay off in a month. With purchasing cards you have the option to set spending limits per cardholder and designate them for certain purposes, which gives you more control over what’s being spent. You can also get monthly rebates, which adds to that income stream. On the other side of the coin, accepting cards for payment allows you to be paid quickly without the need to handle checks and make deposits.
3. Follow up diligently on past-due invoices. An accounting software program like Quickbooks or Quicken will help with your billing and make it easier to send invoices immediately after the delivery of goods or services. Their automated flagging systems allow you to act immediately on overdue accounts so you can follow up with late payers. You may also want to review the terms you offer clients and consider shortening the time they have to pay you, for example 60 to 30 days. At the same time, take full advantage of your suppliers’ payment terms. Use electronic funds transfer (or, again, a credit card) to make payments on the last day they are due.
4. Evaluate inventory and pricing. When you analyze your cash flow, you’ll also want to take a look at your inventory. Do you have too much cash tied up in products that aren’t selling? You may want to consider getting rid of old, outdated inventory at cost (or whatever you can get). Avoid buying more than you know you need, even if suppliers offer big discounts. While you’re at it, check that your prices have kept up with rising costs. Many clients expect their suppliers to put small, regular price hikes in place. If your competitors are charging higher prices, you should too.
5. Plan for shortfalls. The time to prepare for a shortfall is now, not when the need is imminent. It is vital to arrange for a line of credit from your bank before you’re short. With a line of credit you can borrow money up to a preset limit any time you need it, and you pay interest only on the amount borrowed. It’s much more efficient to have one in place than trying to get a loan in a hurry. Often you can get extended terms from suppliers if you ask, especially if you’ve been a good client and keep them informed about your financial situation.

Your financial advisor is a good resource for helping manage your cash flow. In addition to providing a line of credit and purchasing card, he or she can help with your forecast and offer other tools or suggestions that are a good fit for your business.

Jeff Coalson can be reached at 865-602-5260 or by email at Jeff.Coalson@pnfp.com.