Strategies To Improve Cash Flow and Increase Operating Money
You’ve created a business plan, found a location, taken a leap, and finally opened your own business. However, there is one hurdle left to take care of: increasing your operating money and cash flow. This is especially important for small businesses because you don’t have access to ready cash and credit that large corporations have.
This article will explain what cash flow is and why it is important for small businesses. Then we will dive deep into how you can increase your operating money by exploring techniques for optimizing cash flow.
What Is Cash Flow?
Simply put, cash flow refers to all of the money that flows through your company. As a result, having a positive cash flow means more money is coming in through sales than paid out.
In accounting terms, negative cash flow, or being “in the red,” means that more money is flowing out of your business than coming in.
Cash flow is classified into three types. Let’s go over each one quickly:
Operating Cash Flow
Operating cash flow is the cash you take in from your normal, day-to-day operations. You want your operating cash flow to be trending positively to keep your business growing.
Investing Cash Flow
Investing cash flow is money from all your business’ investments, whether securities and stocks, rent for real estate or shared shop space, or even equipment purchases.
If you buy display cases or inventory software, that is an investment in your business. Investing isn’t only about the stock market.
Financing Cash Flow
Financing cash flow is the cash that moves between a company and its owners, investors, and creditors. Financing cash flow is the money that finances your business, including debt and equity.
A simple way of looking at healthy cash flow is to reduce the amount of money going out while increasing revenue, resulting in more operating funds.
Why Is Cash Flow Important to a Small Business?
Cash flow is vital to small businesses because it is the money that keeps your business going. If your business runs out of cash and can’t borrow more, then you’re looking at potentially losing everything you’ve worked for. Cash flow in conjunction with profit will determine how well your business will perform.
High overall profit with low cash flow isn’t necessarily a bad thing. When starting a business, you need more cash than you bring in. The same thing happens if you need to expand your business. It doesn’t mean you’re going to fail, but these are times when you will want to pay extra attention to your profits and cash flow.
Positive cash flow in a thriving small business allows you to:
- successfully plan for the future
- make good spending decisions
- purchase inventory when there is a good deal
- maintain solid business relationships
- pay all your expenses without problems
- meet payroll
- expand
- etc.
Strategies to Improve Cash Flow
Next, let’s look at strategies to increase cash flow, such as increasing revenue, reducing costs, managing your finances, increasing your budget, and more.
1. Increase Prices
Price increases don’t have to be huge to be effective. If you have a large sales volume, even a slight price increase of $.05-$.10 boosts your revenue with relatively little impact on your customers. However, if you are still trying to build your business, immediately raising prices isn’t advisable. You will be better off looking at other ways to add to your revenue.
2. Improve Your Marketing
Enhancing your marketing efforts will bring more customers through your door and help you convert those contacts into paying customers.
Expand your current marketing by focusing on your social media presence and running a targeted print or mail campaign. Offer an incentive to entice customers to make a purchase or give a “welcome deal.”
3. Drive Sales
Driving sales is linked with converting contacts into paying customers. Therefore, create a points-based reward system to incentivize increased spending.
Bundle products or services together for a slight discount that would still be more than the customer was planning to spend in the first place.
Liquidate old inventory by running a “fire sale.” Once a customer is in your business, they are more likely to spend money.
Use naturally-occurring events to create themed advertising like Thanksgiving, Easter, or Back-to-school.
4. Add New Products or Services
Introducing new products or services may seem daunting at first. But if you pick things that complement your current offerings, expanding your range will be a little less intense.
The best way to discover what your existing customers need and want is to survey them. Whether you do this via email, text, or in-store at the time of purchase is up to you.
Once you’ve identified a product or service that your customers desire and that you can provide for them, you’ll be well on your way to increasing profits and revenues.
5. Reduce Costs and Expenses
Reducing costs and expenses is easier than it sounds. However, there are many ways to make small changes with significant impacts.
The key to reducing expenses is to make sure you are not cutting anything that keeps your business running.
For example, if you cut your advertising, that could result in a loss of sales. But, on the other hand, cutting advertising that isn’t working is the right direction.
Take a look at the two articles below for a quick overview of how to cut business expenses.
Cutting Costs and Outsourcing – Part of the 9-hour Business Tuneup
6. Take Advantage of Technology
Using available technology effectively is twofold. First, Tech reduces costs and increases productivity. For instance, if you are paying an employee to perform a repetitive job for 8 hours a day. You could use technology to do that task. As a result, you can save thousands of dollars a year, and you have the employee perform other more productive duties.
7. Get Better Pricing From Suppliers
Your suppliers are an important factor when it comes to costs and profits. For example, you purchase inventory that amounts to $100,000 per month. You find a supplier that can offer your the same products at 10% less, you have saved $10,000 per month. You have also increased your cash flow and profits by 10%.
It’s important to make sure you have the best suppliers. It’s one of the key factors that affect the success of your business.
8. Outsource Certain Business Functions
Depending on your circumstances, you might consider outsourcing some business tasks.
Accounting and IT are the two examples where outsourcing is common, especially in small businesses.
For example, an independent coffee shop doesn’t need an in-house accounting or IT department. The same goes for your favorite neighborhood bike shop, bookstore, or craft supply shop.
Instead, hiring someone on contract to do work when necessary is a far better use of your money.
For more on outsourcing, see 11 Pros and Cons of Outsourcing For You To Consider.
9. Look at Your Monthly Expenses
Taking a good look at your monthly expenses is a great way to reduce costs. You can determine if you are paying too much for everything from your internet connection to your banking service with a little research. Make sure to also keep an eye on those monthly subscriptions or memberships.
Another tactic is to look at your top 10 highest expenses. Then, look at each of the expenses and brainstorm ideas to reduce costs without affecting quality. For example, if you have 5 employees to complete an important task, you might think I need all five of them. But if you consider a new approach to complete the task, you may find a better, more effective way to get the job done.
10. Avoid Extending Credit
Avoid extending credit from your own money! Rather than financing in-house, if you have to deal with credit, offer it through an outside service rather than financing in-house. This way, you improve your cash flow and get paid right away while another company holds the debt.
11. Consolidate Debt
You can consolidate credit card debt and business loans. Look for the lowest interest rates to reduce your interest by nearly a third every year. Additionally, you can get one payment instead of multiple and reduce the total amount you’re paying.
Having a line of credit will do a lot for your cash flow. You can access the money as working capital at a cheaper rate than loans or credit cards.
For example, you may utilize this kind of finance for short-term requirements such as discounted products, emergency repairs, a one-time purchase of essential equipment, or filling a one-time deficit.
12. Increase Your Operating Capital
Increasing your capital is another way to improve your cash flow. Let’s look at options:
Sell Assets
Liquidating assets you don’t need is an excellent way to improve cash flow. For instance, you can liquidate inventory, equipment, vehicles, and property to increase operating capital.
Get Investors
Getting investors may be a route to take to help your finances. You’ll need to look long and hard at the pros and cons of taking on investors, however. Some investors may want some say or control in your business in exchange for their investment.
Conclusion
Cash flow management is a critical element of operating a business. Companies of all sizes need funds to operate. Positive cash flow indicates your company’s health, and there are many methods to improve your operational cash flow.
Using the techniques described above will give your business a solid foundation from which to grow. Just remember to be smart about credit and borrowing, so your cash flow solution doesn’t end up costing you in the future.