Cash Flow Tips for Small Businesses

Business Cash

Small steps to improve cash flow in your small business make a big difference in the long term. This is especially true in the current economic climate where many small businesses are experiencing longer waits before they can collect payments from clients. This can affect cash flow and can make a big difference in how your business functions. The following tips can help if you are having issues with cash flow.

Four Cash Flow Tips

Cash flow can often be increased by cutting back in other areas.

Cut Excess

Cutting excess may seem like a no brainer, but understanding what constitutes excess can sometimes be a challenge.

  • Inventory: Have control systems in place to be sure you maintain only the inventory you need.
  • Stock: Cut back on slow-moving stock to optimize the space you have.

Another way that may help to cut excess and still expand your business is to move to selling your product via a website. This can cut overhead expenses while still expanding your business.

Change Policies

Take a look at current policies and be willing to make changes in those that affect cash flow:

  • Payment terms: If you have a record of paying your bills on time with suppliers, talk with them to renegotiate payment terms to your advantage.
  • Paying on time: Pay your bills when they are due. As a small business, it is easy to sit down once a week or twice a month and pay bills. Paying bills before they are due can affect cash flow. Instead, paying only when bills are due, keeps the money in the bank and your business checking account for as long as possible.
  • Bonuses and commission: If you pay your sales staff bonuses or commissions, only pay once the money from the sale is in the bank.
  • Lease equipment: Another way to save money is to look into leasing equipment rather than buying it. This option allows you to update equipment without a large cash outflow. For instance, leasing a copy machine can help reduce cash outlay not only in saving money that would have been spent to purchase the machine, but it allows for upgrades and maintenance at a lower cost and the flexibility to change to another machine as needs dictate.

Increase Immediate Cash Flow

Steps to increase immediate cash flow are viable, but are often only a short-term solution.

  • Pay by credit card: The use of your business credit card can help free up some cash, but this practice should be approached with caution as an occasional solution to free up immediate cash flow and not a monthly practice that puts you further in debt.
  • Sell assets: Take a hard look at business assets you don't use much or don't need and sell them.
  • Rent our space: If you own the building, another option is to let out space to another business. This may be a small as one office, or the back end of your building depending on the details. Renting out space you don't really need is an ideal way to increase cash flow.

Take Out a Cash Advance

Instead of applying for a bank loan, some businesses are taking out business or merchant cash advances. A cash advance is a lump sum of money given to your company for a share of future debit and credit card income. The lending company collects a specific portion of your company's sales until the loan and any premium fees are collected. The only requirements typically are that you own a business and accept credit and/or debit cards; no collateral is required.

There are some benefits to this form of cash infusion:

  • Cash advances can get money into your company's coffers fast; you could have the money in your account in 7 to 10 days.
  • For many lenders, there also is no specific due date for complete repayment since the repayment is based on a percentage of the company's receipts.
  • In slow months for your company, the amount you have to pay back may go down because repayment is based on sales.
  • If your business goes out of business, you have no obligation to pay the money back to the lender.

One concern with cash advances is the amount of premium that the lending company charges for giving you the money. These advances are expensive; with some lending companies, you may have to pay back an extra 25 to 50% over what you received. You have to determine if this source of financing is a good option for your business and if the premium you may have to pay is acceptable.

In some cases, these advances may be the only quick option for cash for your company. If the premium that you repay is more than the interest that you would have paid with a bank loan, merchant cash advances may not be a good idea for the long-term. Some lenders also put a hard due date for complete repayment, which can put a strain on your finances.

If you decide to get a merchant cash advance, find a reputable lender; some resources to use include the Credit Research Foundation and the National Association of Credit Management.

Consider Professional Help

When it comes to cash flow problems, small business owners are often reluctant or afraid to make changes that can help, especially if they are a small business owner tied to the day-to-day operation of the business. While hiring a professional to help you see the big picture may seem like something you can't afford in a critical economy, in reality, it may be the very help you need to see that it is possible to increase cash flow for your business.

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Cash Flow Tips for Small Businesses