10 Ways to Manage and Maximize Cash Flow

Written by Anne MacRae, Vice President of Business Development with Express Business Funding

Starting a business is not for the faint of heart.

It takes a great idea, flawless execution, hard work, luck and enough financing to support the business, especially in the first few years.

According to a U.S. bank survey, the majority of small businesses fail within the first five years. Surprisingly, lack of sales is not the leading reason. It is a lack of cash flow.

According to an Industry Canada report, 49% of Canadian businesses fail in the first five years and a report by the BDC suggests that ‘even profitable business can fail due to cash flow management”. A study by the US Bank found that roughly 82% of businesses fail because they simply run out of money. Therefore, taking the steps to maximize cash flow is key to survival.

What is cash flow?

Cash flow is the money that flows in and out of your business. Cash flows into your business from your customers when they pay for the products you sell or the services you provide. Cash flows out of your business when you pay for expenses such as supplies, salaries, rent, taxes and loan payments.

If more money is flowing into your business versus flowing out on a monthly basis, you are cash flow positive and will have enough money to pay your bills and invest in growing your business.  If more cash is flowing out of the business than coming in, you are cash flow negative and you will eventually run out of money to fund operations.

So how does a business get into cash flow trouble? One of the main culprits is selling on terms that can lead to a situation where you have to pay suppliers and overhead before being paid by customers.

As sales grow, more working capital is needed to fund operations. In this situation, increasing sales, without considering the impact on cash flow, can make the problem worse. Focusing solely on sales without considering the impact on cash flow can spell disaster. It doesn’t matter how fast sales grow if you have more money going out than coming in each month.

The following are 10 strategies to help you manage and maximize cash flow:

1. Prepare and maintain a 12-month rolling cash flow forecast

You can’t manage what you can’t see. Produce a realistic, detailed cash flow forecast for at least 12 months and update it monthly, or even better, weekly.  Identify potential cash flow crunches and plan accordingly. Keeping on top of your cash flow allows you to prepare for seasonal spikes, take advantage of sudden opportunities and manage through slow periods.

2. Slow your cash outlay

Pay bills only when due. Small businesses often pay bills on a weekly or monthly basis to suit administration.  However, delaying payments even by a few days can improve cash flow. Make payments on the last day possible without paying late. You want to avoid penalties and maintain good relations with your creditors and suppliers.

When cash is tight or negative, prioritize payments.  Payroll is #1. Taxes are #2. Then comes equipment leases, bank loans, mortgages and other items that have been financed.  Late payments to finance companies are reported to credit bureaus and can damage your credit rating, making it harder to secure financing in the future.

Next, pay suppliers who you will need services from in the future. Finally, pay all other suppliers as quickly as possible as cash flow allows. When things are tight, talk to your creditors and try to negotiate extended terms or make partial payments.

Pay by credit card to give yourself an extra 30 days, but only if you can pay off the full balance when due. Carrying credit card debt will only put more strain on your cash flow.

3. Manage your inventory

Trim Inventory and have inventory control systems in place.  Consider the 80/20 rule regarding product lines.  Know which products generate the majority of your sales and profits.  Reduce or eliminate the bottom 20%.

4. Increase profitable sales

Focus on increasing sales, especially to customers who pay cash or pay quickly.  Request prepayment, deposits or progress payments where it makes sense.

5. Establish good credit management practices

Make sure everyone in the company understands your payment terms and policies. Have people dedicated to collections. Measure and compensate salespeople not on when a sale is made but when it is collected.

Set credit limits with customers. Run credit reports on your customers and update them at least every six months. Don’t be afraid to deny or limit credit to overdue accounts.

Lay out payment terms clearly with your customers beforehand and on your invoices. Offer discounts for early payment and penalties for late payment.

Send out invoices promptly and invoice accurately. Don’t wait until the end of the week or month to invoice. Make sure invoicing is accurate. Errors on invoices provide a convenient excuse for customers to delay payment. Always include the due date on invoices.

Chase overdue accounts. Call the day after payment is due. Don’t be afraid to ask for payment.  You are showing your customers that you are organized and on top of your business.

6. Sell your invoices

One of the most dramatic ways to improve cash flow is to sell, or factor, your invoices to a factoring company. You get your cash right away while the factor takes over the waiting period.  The cost can often be offset by securing discounts from suppliers for your early payments.

7. Evaluate your payment terms

Can you afford to sell on terms? Do you have the cash flow to support offering terms to your customers? How do your payment terms stack up against your competitors? Are your customers honouring your payment terms?

Request down payments from new customers and for large orders. Can you reduce your payment term? Reducing your payment terms from 60 days to 30 days will have a significant impact on your cash flow. Do you offer early payment discounts?

8. Segment your customers and focus on the profitable ones

Take a close look at your customers and identify priority customers. Priority customers generate the most profit, not necessarily the most revenue. What can you offer them to incent them to pay earlier?

Identify your worst payers and develop a strategy on how to improve their days outstanding. Decide if they are worth keeping.

9. Segment your suppliers

Take a look at your suppliers’ payment terms. Are they competitive? Can you negotiate longer terms? Are you taking advantage of early payment discounts? Ideally, you want to pay your suppliers after you receive payment from your customers.

If your suppliers’ payment terms are not competitive, look for new suppliers. Identify critical and non-critical suppliers. Try to negotiate better terms with your biggest and critical suppliers. Stretch payments to your one-off and small suppliers when needed to manage cash flow.

10. Review your working capital availability

Do you have timely access to additional working capital when needed to finance growth? How will you manage the cash flow stresses associated with growth such as bringing on additional employees, holding more inventory or purchasing more materials?

Don’t wait until you are in a cash flow crunch to secure additional sources of working capital.  Talk to your banker, alternative lender or financial advisor in advance so you don’t find yourself in a cash flow crisis.

Staying on top of your cash flow is critical to the success of your business. You face a number of challenges as a business owner. Take the steps necessary to make sure the cash flowing out of your business does not exceed the cash flowing into your business.

About Anne
Anne MacRae has been in the factoring, trade financing, and asset-based lending industry since 2006 and is the Vice President of Business Development with Express Business Funding, a leading factoring and ABL company. Having owned her own business in the past, Anne brings a deep understanding of the challenges entrepreneurs face in obtaining financing and managing cash flow and she has used this experience to help hundreds of clients secure funding to grow their businesses. Anne sits on the board of directors of the International Factoring Association, Canada Chapter, and is a regular contributor on panels and in publications on alternative lending. You can reach her via email or on LinkedIn.