How to Improve Your Business Cash Flow | Behalf

How to Improve Your Business Cash Flow

Healthy growing businesses cycle through cash daily, covering operational expenses, raking in profits and paying off debts. If your small business is like a well-oiled machine, its cash flow is constantly in motion. For that reason, it can be tough to differentiate natural dips in revenue from a severe cash flow deficiency. All businesses naturally experience cash flow gaps, but small businesses, who generally operate with low capital reserves, are more vulnerable to succumbing to them. In fact, only half of small businesses survive long enough to make it to their fifth year.

Prove your small business will buck the trend and be here to stay. First, you must understand how cash flows throughout your business to correctly assess its financial state and keep track of it so you notice red flags when they’re present. Always keep an eye on your business accounts so you can spot issues that impede your cash flow. The following accounting practices can alleviate minor cash flow hiccups and protect your business financially.

Maximize Cash Inflow

In order to optimize your business cash flow, you need to keep it moving. How long does it take for your business to convert inventory into profits? A longer cash conversion cycle can slow your cash flow, significantly reducing your company’s profitability by unnecessarily tying up funds. Speed up cash conversion by adding incentives like discounts and special offers to get hesitant customers off of the fence in a timely manner. Try to phase out any business practices that delay the time it takes for your business to get paid for its products and services. For example, if your business offers trade credits to customers, your business cannot benefit from its sales right away so it may feel like there is less capital to cover operational expenses even when there is.

If you do offer credit or lenient payment terms to keep up with your competitors, avoid extending those credits to new customers. Turn it into a reward for established customers that demonstrate loyalty and healthy spending habits. Of course depending on the industry and size of your business, credits may not be applicable to your customer base. After all, you’re running a business not a bank. Still, it may be time to clean up accounts receivables, by cracking down on slow or late paying customers. Ramp up your cash flow defenses, by sending customers payment reminders and, if necessary, making collection calls.

Reduce Cash Outflow

Chances are you have a business credit line, credit card, or another form of financing to cushion your business accounts and cash flow. If not, you need one. You should be making the most out of your available cash flow funding sources, stretching them so that they can cover most if not all of your business expenses. Look for vendors that offer flexible payment terms or trade credit. Often they allow business customers to make purchases and extend payment with free net payment terms. Even if you have the funds to pay business expenses up front, take advantage of the time you are given with trade credits and financing offers, especially when you extend the same courtesy to your customers. A payment solution like Behalf offers up to $50,000 you can use to pay vendors and extend each business purchase up to six months on a customized schedule. Choose a payment method that allows you to control your cash flow at the transaction level so you always have the cash you need to run your business at any given point in time.

Businesses should have enough cash flow flexibility to account for unforeseen expenses and then some. According to Globe Newswire, the average small business keeps only about twenty-seven days worth of a cash reserve. While most financial experts recommend that businesses keep at least three to six months worth of extra cash to cover operational expenses without any cash inflow. It costs to be the boss, so it’s crucial that you don’t settle for a meager cash reserve; grow and protect it with smarter spending and healthy business practices. Don’t jeopardize your business success on assumptions – cushion your cash flow.

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