As a business owner, you can probably tell when things are going in the right direction. Usually, this is during periods when sales are up, and profits are increasing. However, while these are positive indicators, you’ll still suffer the consequences if you fail to remain vigilant. No matter how successful you are at any given time, every company out there is vulnerable to problems with cash flow. So how can a company expedite their cash flow?
The Perennial Question
The first step in answering this question is understanding the problem. Typically, cash flow difficulties arise when various components of your business aren’t quite in sync. A good example of this is when outgoing payments are due before money is set to come in. If this happens frequently enough – technically speaking, you’re spending money you don’t have – you’ll end up placing tremendous pressure on yourself.
Eventually, this can seep into other financial obligations like paying employees on time and building up inventory and supplies. Of course, there’s also the damage you can do to your company’s credit score with consistently late payments.
You can avoid this, all-too-common, pitfall by implementing strategies that have worked for companies in the past. Here are seven ways you can answer the question: how can a company speed up cash flow?
1. Consider Leasing Instead of Buying Outright
As a general rule, it’s more expensive to lease things like equipment and office space than it is to buy them outright. Knowing this, many small business owners don’t consider leasing as an option. While understandable, this often turns out to be a mistake. Leasing may be easier and help maintain your business’s cash flow if you know The Hows and Whys of Small Business Expense Tracking.
It’s a mistake that comes from paying constant attention to your current bottom line instead of the long-term health of your business. It might seem counterintuitive, but leasing is often the better option. It lets you pay in small installments over time, thus maintaining the cash flow you need for your daily operations.
2. Always Do Credit Checks
The temptation to make a sale should never obscure a client’s ability to pay. Of course, there’s nothing to worry about if a client is making a one-off payment. In cases where a client wants to buy on credit, however, make sure you do a thorough check of their credit history.
A bad credit rating suggests the client is unlikely to pay you on time. If this happens with enough customers, the lack of incoming payments can cause serious damage to your cash flow. If you do end up extending credit to this type of client, charge a higher interest rate at the very least.
3. Incentivize Early Payments
For healthier cash flow, many companies incentivize early payments with special discounts for clients who pay ahead of time. This is an everybody wins scenario – the client saves money, and you keep the money flowing in.
4. Consider a High-Interest Savings Account
A high-interest savings account can help increase your liquidity. The more liquid you are, the better your cash flow, so find a bank that’s willing to pay a decent rate for using your money.
5. Form or Join a Buying Group
Buying supplies in large quantities can save your business a significant amount of money, but it can be difficult to buy in bulk all by yourself. Join together with similar companies and vendors that are often happy to give your buying group a hefty bulk discount.
6. Try Charging Higher Prices for a While
Most people understand that things are getting more expensive, so don’t be shy about experimenting with higher prices. Obviously, you’ll have to be reasonable about it, experiment with a slight increase here and there to find out what your customers will pay.
7. Utilize Electronic Payments
Paying your bills electronically can often be a boost to your cash flow. With electronic payments, you have the freedom to wait until the last day that a bill has to be paid. Also, if you have a credit card for your business, you can use the 21-day grace period if paying immediately is going to slow down your cash flow. However, this is something you should only do occasionally.
How Can a Company Speed up Cash Flow? By Paying Attention
Robust cash flow doesn’t happen all by itself. It can only come about by careful planning and design. As you read through the tips outlined above, you might notice a recurring theme. If not, we’ll make it explicit – companies with a healthy cash flow are the ones who pay attention to it. This is the best way to answer the question ‘how can a company speed up cash flow?’ in a truly pragmatic way.
About Robert Caron
Robert is a Certified Public Accountant in the State of New York and a Chartered Financial Analyst. He has worked in the international tax departments of Big 4 and National accounting firms and held various finance and accounting positions in small and medium-size businesses. He specializes in helping people in the real estate and transportation industries, with a focus on international US taxation.