Running a small business can often be stressful, with cash flow issues as one of the leading causes. Understanding and managing cash flow is crucial to your business's health and growth.
We've seen this firsthand and know the pain it can cause. Which is why we've written this article to help you navigate and improve your business's cash flow.
We've split our tips into two categories: Easy and Advanced strategies.
You can implement the easy methods in 20 minutes or less and can act as a quick win on the cash flow front.
The advanced methods may need a bit more thought and effort, but can offer significant improvements in cash flow.
Easy Ways to Improve Cash Flow in Your Business
Take Advantage of Supplier Payment Terms
One way to improve cash flow is by extending your supplier payment terms. This means negotiating with your suppliers to allow you to pay your bills later, giving you more time to use that cash in your business.
It’s not a cure-all because the bills still come due regularly, but it does help keep more cash, longer.
Make Your Payment Terms Clear
On the flip-side, another way is to make your payment terms clear on your invoices. This ensures your clients know exactly when to pay you, avoiding any late payments that can tie up your cash.
This is as simple as including a due date on your invoice at the top and a quick blurb at the bottom stating that payment is due in x number of days.
The shorter your payment terms, the faster you’ll receive your money. However, you’ll want to offer a balance as overly tight payment terms may scare away some clients or customers.
Deposits or retainers can also help. This means asking for a percentage of the payment upfront before you begin work on a project. This not only secures your cash flow but also minimizes risk.
Provide Early Payment Discounts
Consider offering small discounts for early payment from customers or clients. This can incentivize them to pay sooner, getting cash into your business faster.
For example, you could offer a 2% discount if the invoice is paid within 7 days or the full amount if it’s paid in 14 days.
Enforce Late Payment Penalties
On the other hand, consider adding penalties or interest for late payments. This can encourage clients to pay on time and compensate you for any cash flow disruptions.
In our example above, we offered a 2% discount for payment in 7 days or the full amount due in 14 days. We could also include something like a 1% monthly cost for late payments to motivate clients to pay on-time.
Add a "Pay Now" Button to Your Invoices
Add a “Pay Now” button on your invoices. This allows customers to pay with one click, making it easier for them to settle their accounts promptly.
Convenience is so important and will make a huge difference in how fast your invoice is paid. We use Xero for our accounting software and adding a “Pay Now” button takes about 5 minutes of setup. It’s well worth it.
Have a Sale
Discount older inventory to sell it more quickly. This will bring in immediate cash and free up space for items that might sell better.
This is super common in retail businesses, but can be used to quickly earn some cash in a service business as well. Just make sure to watch your margins so you’re still making enough on the sale!
Get a Line of Credit
A revolving line of credit can provide a cushion for temporary cash shortfalls. This provides a safety net when cash flow is tight.
Check out our top business bank accounts article for our thoughts on the best business bank accounts in Canada.
Check Your Software Subscriptions
Finally, make sure you're not paying for software subscriptions you don't use. We do this twice a year and often find subscriptions we no longer need.
This small step can save a surprising amount of cash, Joe. 😅
Advanced Ways to Improve Cash Flow In Your Business
While the above methods are simpler to implement, the following methods are also effective but might require a bit more effort.
Increase Your Prices
While it might seem daunting, increasing your prices can often result in a net positive effect on your cash flow. Underpricing your products or services can often lead to cash flow issues and undervalues the quality of your work.
Higher prices mean more cash is coming into your business with each sale or project, directly improving your cash flow - simple!
However, the benefits of raising your prices extend beyond just the financial.
Clients who are willing to pay higher prices for your products or services are often less price-sensitive. They value quality and are willing to pay for it, which can lead to longer-term, more stable relationships.
They are often more appreciative of your expertise. Plus they usually need less hand-holding or support than clients who are focused on price.
Finally, higher prices can enhance your brand's perception.
There can often be a “cheap = bad”, “expensive = good” consumer perception.
Higher prices can position your business as a premium provider in your industry. This helps attract high-quality clients and customers who are willing to pay for superior products or services.
That said, any price increase should be thoughtfully implemented. Be transparent with your clients about why prices are rising, and highlight the value they are getting. In most cases, clients who truly value your services will understand and remain loyal.
Apply for Government Incentive Programs
Seek out government incentive programs. Tax credits, subsidies, grants and other financing opportunities can improve cash flow in your business.
These can provide a helpful cash injection to your business and improve cash flow. Various tax credits and programs are available to businesses. Understanding and utilizing these can result in significant savings and improved cash flow.
Check out this Government of Canada page that allows you to search out opportunities.
Try a quick Google search to find opportunities for your business:
- “Business Subsidies and Grants for ____ business.”
- “Tax credits for ____ businesses”
These will help find funding for your business type.
Here are a few common ones to get you started:
- Canada Small Business Financing Program (CSBFP): This program assists small businesses in obtaining loans from financial institutions by sharing the risk with lenders.
- Industrial Research Assistance Program (IRAP): Provides financial support to qualified small and medium-sized enterprises in Canada to help them undertake technology innovation.
- Business Development Bank of Canada (BDC) Financing: BDC offers various financing options including loans and equity investments to help Canadian businesses grow.
- CanExport: This program provides direct financial assistance to small and medium-sized businesses that are seeking to develop new export opportunities and markets, especially high-growth emerging markets.
- Sustainable Development Technology Canada (SDTC) Funding: SDTC helps Canadian entrepreneurs accelerate the development and deployment of globally competitive clean technology solutions.
- Canada Job Grant: Provides funding to help employers provide training to their employees. This program is designed to meet the specific needs of businesses and help them stay competitive.
- Scientific Research and Experimental Development (SR&ED) Tax Incentive Program: This is a federal tax incentive program designed to encourage Canadian businesses to conduct research and development (R&D) in Canada.
Check out a provider like Boast that can help you determine eligibility and claim SRED credits for your business.
Decrease Labor Costs
Ensure you are not overspending on labor costs. Monitor your team's productivity and ensure that their salaries align with market rates.
Understanding your team’s capacity plays an important role in ensuring your labor costs aren’t detrimental to your cash flow.
We use a “capacity planner” at Avalon to measure the team’s workload. This helps us know when we need to find more work for people and when we need to hire more staff!
Use a Forecast or Budget
Reducing low impact expenses can help improve cash flow. Review your costs regularly and look for areas to cut back.
We’ve started running an annual forecast for Avalon that shows our expected revenue and expenses each month. Each month we report on our actual amounts versus what we expected was going to happen.
If there are any significant deviations in expenses, we can look into them more closely and determine which costs could be reduced.
This one sounds a bit silly, but being frugal is a great way to improve cash flow.
Consider buying lower-cost items if they serve the same function as their pricier counterparts. This can save you money without sacrificing quality or efficiency.
I previously worked for a business that truly knew the value of saving a dollar. The business became very profitable by always focusing on getting a slightly better price for everything.
Each small saving added up and the effect on the bottom line and cash flow position was significant. Thinking back on this, it was actually quite a spectacular thing to see!
Outsourcing certain business functions can sometimes be more cost-effective than maintaining them in-house.
Evaluate your business's needs and consider if outsourcing might be a viable option.
At Avalon we outsourced our marketing work for years instead of hiring a full-time team member.
Our whole business is even based around this concept! We intend to bridge the gap for businesses that don’t yet need a full time finance function in their business.
So if this sounds interesting, check out our services page 🙂
Lease or Finance Equipment
Instead of purchasing equipment outright, consider leasing or financing. This allows you to spread the cost over time, improving cash flow.
You can learn a bit more about leasing vs. buying a vehicle here.
Take Less Draws
We don’t want to advocate paying yourself less as an owner, but there are situations where it’s necessary to reduce your owner draws.
If cash is still tight, you may need to consider reducing your owner draws temporarily. This can help keep more cash in the business while you implement other cash flow improvement strategies.
Once you implement a few of the other strategies, you’ll be back to earning an appropriate return on your investment as the owner of the business.
Managing cash flow is a vital part of running a successful small business. It's not always easy, but with these strategies, you can significantly improve your cash flow situation.
You don’t need to implement every strategy at once. By taking proactive steps to improve your cash flow, you're building a stronger, more resilient business for the future.
So take that first step today and see the difference it can make to your business's health and success.