While challenges are bound to arise, a calculated approach towards cash flow management can secure your business’s financial health, propelling it towards a prosperous future. Invoice factoring involves selling your accounts receivables to a third party (a factoring company) at a discount. Instead of waiting for slow-paying customers, the business receives most of the money upfront (usually between 70-90% of the invoice value). By raising prices, the amount of money brought in per sale increases.

There are a number of operational tweaks you can make to increase your cash flow without raising prices or disrupting your business and client relationships. If you need help organizing your current cash flow statements and forecasts you can download our free cash flow statement or partially automate the process by checking out LivePlan. Additionally, you’ll want to be on the lookout for prompt payment discounts. While a good rule of thumb is to push payments as long as possible, you may find that vendors provide substantial discounts if you pay on time or earlier. Weigh the potential cost savings here and be sure that you still have enough money in the bank if you plan on paying bills more quickly. If the customers are consistently defaulting on payments, you may even consider imposing penalties for late payments or fees.

Forecast cash flow and manage that forecast carefully

Many commercial lease agreements include servicing, so if you’re spending a lot on technicians’ fees, leasing may be a better option. You can also reduce the risk of unpaid invoices by adding late payment fees. Be sure to clearly highlight the late payment penalty in the initial customer contract and again when you first invoice, explaining what the fee is and when it applies. One tactic to encourage clients to make a payment early is by offering a discount, for example a two percent discount on the value of the invoice if payment is made within seven days. Other early payment incentives could include a discount on future orders, gift certificates or merchandise.

• If you don’t have clear goals for your business, this should be at the top of your to do list.
• You can also create a special rewards program with gift cards or other items.
• Ling has significantly improved its financial management strategies over time.

Now keep in mind that you’ll likely need to include prompt payment discounts as part of this process. If your customers are also business owners, they’re likely going through the same process of stretching their accounts payable as much as possible and require an incentive to pay sooner. Schedule payment of your general journal description entries example bills to happen on the day before they are due. This is what professional organizations like utilities and credit card companies expect. This is one tactic that slows the speed at which cash flows out of your business. Think about it this way; the more efficient you become, the less money you spend on a product.

Use Invoicing & Accounting Software

With both options, you benefit by having payments that are easier to manage and potentially lower interest rates. However, if you compare it to the costs of credit, it might make sense and save you more money down the line. You’re constantly having to stay on top of what you have, what you’re selling, and what’s sitting too long. Your recurring expenses are the constant costs of running your business. In a recent survey of businesses that failed in 2022, 44% cited running out of cash and 47% cited a lack of financing.

Additionally, invoice factoring eliminates the risk of non-payment from slow-paying customers, as the factor is responsible for collecting the full amount. This can help businesses avoid cash flow issues and maintain a steady income stream. Leasing refers to the process where a business arranges to use assets, like vehicles or equipment, by paying in instalments rather than purchasing them outright. These timely payments can be cost-effective and manageable, which helps maintain steadier cash flow.

Meaning that they are regularly testing different terms based on their customer’s needs and replacing any that don’t perform well. To avoid cash flow problems, when you submit a project proposal or contract, set clear payment terms in writing. Likewise, when sending an invoice, ensure that the payment terms are spelled out again. Relaying a consistent reminder keeps you and your customers accountable and ensures there is no confusion as to what expectations for payment are. Businesses that are making plenty of sales, but not getting paid on time (or at all) are at risk. You can be reporting solid revenue on paper, but unless you have cash in hand, you’re not going to be able to pay your bills.

Customer Service

Because of that, it might pay out a lower percentage of its free cash flow in variable dividends in 2024 if its share price stays low. Accurate cash flow forecasting is the life blood of every business. Read our guide and download your free cash flow forecast template today. A business loan can provide a quick infusion of cash, but it should be considered carefully.

Improve Customer Account Management

When you follow up with them, it shows them that you’re aware of two things. You know that they owe you money, and they know that you’re thinking about them. Sometimes that simple interaction is enough to increase business and incoming payments.

If your business has any unpaid invoices, it means that you’re missing out on possible cash inflows. Accounts receivable is a huge part of any company’s cash inflows. If you’ve sent invoices that have no response, then it’s time to make paying more appealing. There are a number of ways to do this, but discounts always seem to do the trick. Cash flow analysis is the first step to understanding how to improve cash flow. If you keep up with your company’s accounting records, you should have a good understanding of cash flow.

Understanding What an Exit Plan Is & Its Importance

When considering financing, always stay away from predatory loans with ultra-high interest rates. If you have cash sitting in your company savings account, put it to good use. Investing surplus cash in safe, liquid assets like money market funds or high-yield savings accounts can generate additional income. That extra savings might not seem like much at first but adds up over time. The key here is balancing supplier relationships and convenient timing for payments. If you can, find a way to pay contractors, suppliers, and others at a time of the month when your income is highest.

It can also be elevated, if to come out of it, your business takes up a loan. This is because, even if a business is doing exceptionally well, there might be a gap between its receivables and payable such that payable are due earlier. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Charlene Rhinehart is a CPA , CFE, chair of an Illinois CPA Society committee, and has a degree in accounting and finance from DePaul University.