Cash-Flow Management: 8 Methods to Help Improve Cash Flow

Stressing about cash flow can be a common problem for many small-business owners. In fact, managing cash flow was cited as the single biggest challenge for 62% of 19,675 U.S. small- and medium-sized businesses in a 2023 Thrive Analytics survey.

After all, without adequate funds, business owners can't make payroll, cover day-to-day operating expenses, or pay their suppliers. Even worse, a shortfall could make the difference between whether a business thrives or dies.

Effective cash-flow management can put your business on much stronger footing, allowing your company to navigate changes in market conditions and take advantage of opportunities to grow. Here are eight tips for improving cash flow to help allow your business enough financial breathing room to remain resilient and continue to succeed over the long term.

8 Ways to Help Improve Cash Flow

To help improve your cash flow, consider: 

1. Negotiating quick payment terms
2. Providing incentives and charge penalties
3. Checking your accounts payable terms
4. Cutting unnecessary spending
5. Leasing instead of buying
6. Maintaining a cash-flow forecast
7. Studying your cash-flow patterns
8. Using invoice factoring

1. Negotiate Quick Payment Terms

After making a big sale, you might be tempted to celebrate, but remember, you also should try tomake sure your clients deliver payments in a timely manner. If your accounts receivable – the amount that customers owe you for goods and services – start to pile up because clients take too long to pay, you can easily find yourself with a cash-flow shortage, even if your business is highly profitable on paper.

To help ensure timely payments, try to start by negotiating payment deadlines with your clients. You could also require a deposit up front to immediately generate some cash or offer installment plans that allow for consistent payments over time. And as soon as a client is late on a payment, consider reaching out with a reminder. If you’re having trouble keeping track of payments, consider using invoice management and accounting software to automate the process and accept payments electronically.

2. Provide Incentives and Charge Penalties

Try to send out invoices promptly after delivering goods or services. One tactic that may encourage clients to make early payments: offer a discount, such as 2% off the invoice total, if payment is made within seven days. Consider creating a loyalty program, providing customers with benefits for making early payments, such as discounts on future orders, gift certificates, or additional merchandise. Try to include these incentives on the invoice so the client is immediately motivated to take advantage of the offer.

You can also help reduce the risk of unpaid invoices by charging late payment fees or interest for overdue payments. You should clearly highlight the late payment penalty in the initial customer contract and again when you send the invoice, explaining any fees and when they apply. If you still don’t receive payment, consider putting a temporary hold on a customer’s future purchases until the outstanding balance is settled.

Leasing equipment for a fixed monthly fee can allow you to make smaller incremental payments that don’t take a huge bite out of your cash reserves. 

3. Check Your Accounts Payable Terms

As you speed up processing accounts receivable, consider the opposite strategy for your accounts payable, the amount you owe vendors for goods and services received. Instead of sending out a check as soon as a bill comes in, consider checking the terms to see how long you can wait on payment without incurring penalties. Holding off on payment until these deadlines approach can help prevent a cash shortage.

Try not to be afraid to negotiate, either. Consider contacting vendors and asking whether they’d give you longer payment terms in exchange for your repeat business. Finally, when you have enough cash readily available, try to inquire whether you could qualify for a discount for paying early. This way, you can boost your profit margins when cash is plentiful while you buy more time when money is tight.

4. Cut Unnecessary Spending

Business expenses can sneak up on you: extra office space you don’t use, storage for unsold merchandise, nonessential software subscriptions, and unnecessary travel, to name a few.

Each individual purchase may be small, but combined they can turn into a serious drain on your cash flow. Try to aim to regularly conduct a thorough review of your company’s expenses and look for areas to cut costs in big and small ways. For instance, consider maintaining tight inventory levels to avoid extra holding costs while at the same time making sure stockouts aren’t causing lost sales opportunities. Or try outlining a spending plan for the year, reducing certain costly expenses during seasons they are not required to keep the business running smoothly.

By dedicating time to business expense management and cutting out unnecessary spending, you can help conserve resources.

5. Consider Leasing Instead of Buying

Business owners can often avoid the large up-front costs of new equipment and other capital expenditures by renting instead of purchasing items. Leasing equipment for a fixed monthly fee can allow you to make smaller incremental payments that don’t take a huge bite out of your cash reserves.

Remember to consider the cost of repairs and maintenance of equipment the business owns when weighing the benefits of leasing versus buying. Many commercial lease agreements include servicing, so if you’re spending a lot on technicians’ fees, leasing may be a better option.

Leasing can also provide business owners with more flexibility to manage their assets. For example, at the end of a lease term on a piece of technology, the business can choose whether to renew the lease or upgrade to newer technology to meet its changing needs.

6. Maintain a Cash-Flow Forecast

A cash-flow forecast is a financial planning tool that estimates the amount of cash moving in and out of the business during a specific period. Many businesses create quarterly and annual forecasts, breaking down liquidity predictions on a month-to-month basis to take into consideration seasonal variations in cash flow.

Try to regularly review and adjust your cash-flow forecast as circumstances change, as this can help you more accurately predict future cash needs. For example, a forecast can help you identify periods of surplus cash to plan for making investments, as well as any potential shortfalls so you can secure additional funding.

In addition, a business looking to attract investors and access loans may offer to share a cash-flow forecast to show that the business is healthy enough to meet its payment obligations.

7. Study Your Cash-Flow Patterns

Only 2% of the 1,483 business leaders and finance and accounting professionals questioned in a 2022 survey by BlackLine, a financial operations management platform, expressed complete confidence about their visibility into their companies’ cash flow, and 49% were worried that their organizations were making decisions based on inaccurate or outdated information.

However, cash-flow shortages don’t have to catch you off-guard if you pay close attention to your company’s cash flow patterns. You should analyze your business’s cash-flow trends by creating a comprehensive cash-flow statement that details the sources and uses of cash. Try to pay particularly close attention to whether you maintain a positive operating cash flow, which is important to sustaining core business operations.

In addition, aim to regularly compare actual cash-flow figures to forecasts. When you spot discrepancies, consider making adjustments to future forecasts to help you anticipate potential shortages. You may also want to consider using financial management software, which can help you obtain a clearer picture of your cash flow by tracking and analyzing money patterns in real time.

8. Consider Invoice Factoring

Invoice factoring allows businesses to free up ready cash by sending outstanding invoices to a third-party company for collection. Typically, the third-party company can buy an invoice for 70-90% of its total value and then will chase the client for payment. Once the customer pays the full invoice amount, the third-party company can pay the vendor the final balance of the invoice, minus its fee.

Instead of waiting on customers to pay invoices for weeks or months and spending resources on attempting to collect payments, invoice factoring allows businesses to receive large sums of cash quickly. For businesses that have high-value invoices – which could negatively impact cash flow if they go unpaid for long periods – invoice factoring can be a low-risk way to free up working capital.

The Bottom Line

Effective cash-flow management can be critical to the survival of small businesses. To learn how to help improve cash flow in a business, try analyzing cash-flow trends, negotiating favorable payment terms with clients, and cutting unnecessary costs. By keeping close tabs on cash flow, small businesses can help make sure they’re prepared to handle unexpected financial challenges, take advantage of growth opportunities, and position themselves for long-term success.

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