You have a profitable business, your customers are happy, and you have great relationships with your suppliers—you’re in excellent shape, right? 

While all of these areas are vital to growing your small business, there’s still one thing that could cause problems: cash flow. Even if you have good revenue and reasonable profit margins, you need to pay for your business commitments on time, or it’s easy to run into trouble. 

Fortunately, there’s plenty you can do to optimize your business cash flow, and we’re here to help.

Small Business Cash Flow, Explained

Your cash flow is the total amount of money coming in to and going out of your business. Money comes into your business from selling products and services, investments, and other sources of revenue. Money goes out of your business when paying staff, making payments on rent or equipment, buying inventory, paying taxes, and for dozens of other reasons.

You always want your cash flow to be positive—in other words, your small business should be taking in more than it spends. This ensures your business has “liquidity.” You can use this liquidity as a cash buffer against unexpected events, invest it to grow your business, or take some of it out to pay owners or shareholders. Your cash flow works together with your working capital cycle to help you maximize opportunities.

Difficulties Caused By Having Poor Small Business Cash Flow

If your small business has a very low positive cash flow, or even a negative cash flow, you might run into any (or all) of the following issues:

• Can’t pay suppliers on time, resulting in poorer relationships, delayed inventory, and you paying interest on unsettled invoices.
• Delayed operational payments for costs like utilities or rent, causing potential interruptions to the business environment.
• Inability to compensate workers, leading to low morale and employees refusing to work.
• Low owner and shareholder returns, increasing pressure to get costs under control.
• No free cash for investment, lowering competitive advantage or ability to break into new marketplaces.
• Less resilience to react to unexpected internal and external circumstances.

How to Increase Positive Cash Flow for Your Business

Fortunately, there are several powerful steps you can take to optimize cash flow.

Incentivize Customers to Pay Your Invoices as Soon as Possible

Money in the bank is better than outstanding invoices, so you want to get customers to pay you fast. There are several ways to achieve this:

• Setup clear payment terms for your invoices, 30-day terms are standard.
• Ensure that you are sending invoices to the right people, as otherwise there may be delays getting your invoice to accounts payable.
• Give discounts to customers that pay their invoices quickly, a two percent discount for paying in ten days is a good standard.
• Make it easy to pay, offer multiple options including bank transfers, credit cards, debit cards, and other methods.
• Charge fees on late payments, so after 30 days you might charge fees of 1.5% of the outstanding amount per month.

Work With Suppliers to Get Favorable Payment Terms

The other side of the invoicing coin is to get as long as you can to pay supplier invoices:

• Build up a good reputation with suppliers as a solid customer.
• See if there are criteria for qualifying for longer payment terms (e.g. ordering a certain amount, taking advantage of supplier financing, etc.)
• Ask if you can move to 60-day or 90-day terms for payment.
• Pay suppliers on the due date for the invoice, not early or late.
• Look for suppliers with better default payment terms.

Understand Product and Service Trends and How They Impact on Cash Flow

Demands for your products and services will vary throughout the year and as various external factors impact on your small business marketplace. You can take advantage of these trends to optimize cash flow:

• Analyze your supply and demand cycle to see when you need to hold extra inventory or provide additional services, and ensure you have the liquidity to meet those needs.
• Use machine learning and forecasting to predict likely future trends, so you can be prepared in advance.
• Talk to suppliers about providing stock “just in time” so you only need to hold enough inventory to meet immediate demand and can get resupplied quickly.
• Sell old or slow-selling stock at a discount to release any money tied up in inventory.

Explore Options for When You Need to Buy Business Assets or Inventory

You have a couple of options for how you buy equipment, assets, and inventory for your business:

• Look at leasing equipment and assets rather than buying outright. Although leasing can be more expensive in the long run, you won’t need to find all the capital upfront and depreciate over time. This doesn’t just apply to physical assets and equipment, but also to virtual ones, like pay-as-you-go cloud software.
• Take part in a Buyer’s Collective. These are groups that pool together their members when purchasing from suppliers. Due to larger orders from multiple members, these collectives can often negotiate better prices and more favorable payment terms.

Use Business Financing and Loans Wisely to Manage Cash Flow

It can be tempting to take advantage of accounts receivable financing, invoice factoring, lines of credit, or other short-term debt to get through lean periods:

• Understand the actual, fully-inclusive fees and interest you will pay if you use these services.
• Seek out lenders who specialize in this type of business financing, and read through all the terms and conditions.
• Do not use this type of financing for medium- or long-term money needs, as the fees and interest rates can become prohibitive.
• For longer-term financing needs, consider other small business loan products.

Enhance Financial Management in Your Small Business for Healthy Cash Flow

Good financial discipline throughout your small business will relieve the pressure on your cash flow:

• Put aside an emergency “buffer” within your business so that you can take care of around three months of operational expenses, so you’re not paying next month’s bills with this month’s income.
• Go through every expense your business has and look for ways to reduce or optimize those costs.
• If you have lots of variable costs, talk to suppliers about going onto payment plans, where you pay a fixed amount each month.
• Understand the total cost of products and services so you have a solid understanding of profit margins and can price appropriately.
• Work closely with your bookkeeper and accountant to understand likely taxes and other liabilities, and build these into your forecasting and cash on hand. 

These initiatives can all help you get into a stronger financial position—ensuring you have enough cash-on-hand to meet all of your commitments. Getting your small business cash flow right will reduce stress, help your business become more agile, and ensure you can take advantage of every opportunity.