Your company’s growth and future success hinge upon your daily cash flow. The SME Administration cites “inadequate cash reserves” as a primary reason why startups fail. Fortunately, there is a variety of measures that business owners can take to improve cash flow. Below is a look at the importance of having cash reserves on hand and seven strategies to help stimulate cash flow for your business.
Why is it important to have cash reserves in the bank?
Growth is often dependent upon a company’s ability to take on new customers and fill unexpected large orders. These tasks become extremely challenging to handle without sufficient cash reserves in the bank. Some of the top reasons why you should have plenty of cash in the bank include the following:
- You have the ability to pay overtime staff required for completion of large projects
- Ability to handle payroll and operating expenses even if your largest customers are late on payments
- You will have the funds to pay for additional inventory required to fill unexpected bulk requests
What are some effective ways of increasing cash flow?
Cash reserves are a necessity for your business to sustain growth and survive unexpected interruptions in cash flow. Fortunately, there are many simple measures that your small business can take to bolster your cash reserves. Below are seven effective ways to increase cash flow for your business.
1. Clearly outline all of your accepted payment modes to your customers.
Some customers may not be aware that you accept payment in advance by bank wire transfer or credit card. You can increase your chances of receiving payment in advance by clearly stating your accepted modes of payment on your quotes, your website, and on all invoices.
2. Thoroughly evaluate new customers before agreeing to payment terms.
Avoiding the urge to immediately give into a new customer’s request for payment terms can help avoid delayed payments. Be sure to carefully screen new customers’ credit and payment histories before agreeing to payment terms.
3. Prepare and send invoices immediately after goods or services are rendered.
The faster you generate invoices for customers, the faster you can receive payment. You can expedite invoice preparation by sending invoices to customers electronically immediately after orders are completed.
4. Give special pricing to customers who pay up front for goods or services.
Customers who pay in advance for their orders help keep your cash flow strong and deserve to be rewarded for their advance payments. Offering cash discounts or preferred pricing are two ways to give customers incentives for paying when they place their orders.
5. Use a company credit card in a pinch.
Sometimes you might be short on cash but need to pay a vendor for products to fill a large, lucrative order for a new customer. In such cases, you can use a low-interest company credit card to cover expenses required to fill a large order.
6. Ramp up your collection efforts, especially before the holidays approach.
Major holidays can be financially taxing on small businesses. In addition to facing additional expenses, many businesses fail to generate revenue during the holidays because they are closed. This makes it particularly important for businesses to begin collecting on unpaid invoices well in advance of national holidays.
7. Hire a virtual CFO for your business.
If your business falls into the 50% of businesses that do not have a CFO, you may be in need of an experienced professional who can oversee your cash flow management. A virtual CFO can provide decision-making expertise and financial leadership at an affordable rate.
By following the steps above, you can optimize cash flow for your business and be prepared to handle unexpected large orders that can take your business to the next level of success.
About David Officen
David is the Founder and Managing Director of proCFO. David combines an accounting and consulting background with commercial experience both as a manager for large commercial businesses and as the owner of private and family businesses.