Running a business is hard work – juggling day-to-day priorities while simultaneously reacting to shifting market conditions and demand. It’s likely your first priority is to ensure the business is successful, which includes optimizing the company’s income/expense ratio. However, many business owners still wonder how to improve cash flow. To help effectively respond to evolving liquidity needs, take a look at the following tips for improving cash flow.
1. Develop a forecasting model
One of the best strategies for improving business cash flow is to develop a forecasting model and method that works for the business. To predict the amount of income it will have over the course of the year, it’s important to understand the ebbs and flows of the company’s purchase journey and the changes in the market that may impact customer choices. If the forecast consistently puts the company in a tight spot financially, dedicate some time to review processes and numbers with a business banking partner.
2. Identify investment opportunities
Building a cash optimization plan starts with an understanding of business operations and goals—and their timeframes. Business expenses can be broken into four segments: operating, reserve, strategic and restricted. Mid-term opportunities like time deposits, money market funds and escrow are easy to access if needed and provide cushion to cover seasonality in cash flows or unforeseen operating expenses. Long-term investments have a potentially higher return with higher risk, like bonds (corporate, government, agency and municipal) and treasury notes. These investments earn yield on idle funds and help diversify your asset portfolio.
3. Understand supplier payment options
Balancing supplier payments with receivables is tricky and can make even the most experienced business owner nervous. Many companies choose to pay suppliers with a check, which provides a 1-2 day “float” period before the money is debited from the business account. If that is all the time you need, that’s great, but some businesses prefer a longer buffer. To extend that timeline, you can pay suppliers with a credit card, which allows you 30 days to collect receivables before the cost hits your account. However, make sure you can adequately manage payments to minimize interest charges.
Another tool that can help float expenses is business overdraft protection. This product keeps business transactions moving, despite an accidental overdraft, and serves as an overdraft line of credit by automatically linking a business checking account to the credit line.
4. Consolidate debt
If a company has extensive bills and outstanding balances, debt consolidation could be a smart strategy to move existing debt into one streamlined payment. Debt consolidation can potentially provide a longer repayment period or lower interest rate, ultimately improving cash flow and liquidity availability.
5. Take a closer look at competitors
If it feels as though the company should be bringing in more sales income, improving cash flow may mean conducting a competitor review. Questions to ask can include:
- How do competitor product lines or services compare?
- Is pricing similar or way off-target?
If the company is selling products and services for substantially less or more than competitors, it may be damaging chances to maximize income. Try to maintain fair market value for goods—pricing items too low can mean missed profit, but pricing items more than they are worth to the consumer likely means fewer sales.
6. Assess and evaluate inventory and supplies
If cash flow is top of mind, take a look around. Is there old, outdated or obsolete equipment that can be sold, refinanced or salvaged? Spend some time reviewing assets to determine how they can help the business work smarter and gain back some liquidity. If the business is inventory-based, assess supply regularly. Are there enough of the essential items? Is there too much inventory of something that sells inconsistently or seasonally? Holding on to supplies can constrain cash supply, so order carefully and clean out frequently.
7. Review banking relationships
If this hasn’t been done lately, it may be time to evaluate all of the tools and tricks the bank can provide to help improve cash flow. For instance, if receivables are slow enough to cause concern, review payment solutions to make sure customers are able to quickly and easily pay. And check for interest-earning accounts for business accounts that carry larger balances so the company can earn more over time. In addition to these options, there may be other cash management tools the bank offers that can help optimize monthly income and expenses.
Improving business cash flow and maintaining positive cash flow are essential to operations. With a well-maintained balance sheet, you can help your business adapt to changing market needs and ensure the company continues to run smoothly. These tips can help you keep the company nimble for the next big thing that comes through the pipeline.
If you are interested in learning more about how UMB can help your business as a financial partner, visit our website.