How To Improve Your Company’s Cash Flow

Maintaining a healthy cash flow can be important for your company’s reputation and credit approval. This involves making sure that money is coming in at a faster rate than it is coming out. If money isn’t coming in and you owe payments, you’ll likely end up missing payments or having to take out loans to cover expenses.  

Sometimes a poor cash flow can be the result of running an unprofitable business. However, most of the time, this isn’t the case - your company could be profitable, but your customers may not be paying you on time or you could be failing to budget effectively. Below are just a few ways in which you may be able to improve your cash flow.

Chase up late payments

Late paying customers can be a real inconvenience. In many cases, a vicious cycle can form - you could end up paying your own creditors late.

Some customers will hold off paying you for as long as possible until you chase them up. As a result, if customers haven’t paid you, you should never wait it out. Send them an email or a text as soon as they miss a payment to remind them that money is due - and keep chasing them up until the money is paid. 

If customers bill you on a monthly basis on a specific date, you may be able to set up automatic emails or texts to alert customers whenever money is not paid on time. This could be easier than having to chase up payments manually. If customers proceed to still not pay up, ring them, and try to get to the bottom of the problem. 

If you’re strict with chasing up payments, you could find that a lot of customers get into the right habit of paying you on time. There may be some customers that continue to repeatedly miss payments or never pay. You may have to eventually cut off the former if it becomes a problem, while you may have to seek legal action for the latter. It’s important that you never get angry with customers and that you don’t harass customers with payment reminders - threatening or harassing behavior could be used against you if it turns into a legal battle (for most companies, this hopefully shouldn’t happen very often). You can read this guide to chasing up late payments for more tips. 

Make use of invoice factoring

Ideally, you shouldn’t have to take out loans to cover late payments. However, if you owe money and there’s no other option but to borrow money, invoice factoring may be the best solution. 

An invoice factoring company immediately pays you any money that you are owed by customers so that you can finally get paid. The company then chases up your customers on your behalf and takes the money for themselves. The catch is that you will generally only get paid 90% of what you are owed. However, if you’re in need of quick cash to cover payments and you’re tired of chasing up a customer, this small loss could be worthwhile. 

Run credit checks on new customers

When it comes to charging in installments or billing customers on a monthly basis, you can often avoid taking on chronic later payers by running a credit check first. This can help to evaluate a customer’s credit score and determine how likely they are to pay on time. A customer that consistently misses payments is more likely to have a poor credit score - hence, you may want to avoid taking on customers with poor credit scores for this reason.

You can check customers’ credit scores by signing up with a credit reporting agency. This is free for small businesses - larger businesses that require more frequent credit checks may have to pay a fee. 

Consider these other methods of reducing late payments

There are a few other ways in which you can discourage late payments. These methods include:

Charging late payment fees: Many customers will pay up if threatened with the prospect of late payment fees. When a customer fails to pay on time, provide a warning telling them that a fee will be charged if they do not pay by a certain date. It’s important that these late payment fee guidelines are followed.

Offer early payment discounts: You may be able to encourage customers to not only pay on time but to pay early by offering early payment discounts. This could be a useful incentive for customers paying in installments. 

Allowing payments via credit card: A customer may not have to pay you installments if they can pay by credit card. This allows you to receive the full amount upfront, while also allowing them the convenience of paying installments to their credit card provider. Consider looking into accepting credit cards if you don’t already.

Sending payment reminders before payments are due: Sending customers a payment reminder a couple of days before a payment is due could encourage your customers to check that they have enough money in their account so that the payment isn’t missed. 

Start setting aside savings

Late payments aren’t always the cause of cash flow problems. Unforeseen emergency costs such as machinery repairs may cause you to have to spend money you hadn’t budgeted for. This could then leave you unable to pay creditors. Alternatively, you may run a business that has seasonal lows, in which case you may have to struggle through certain months with little income. 

In either case, it can be useful to have savings set aside that you can dip into. This could allow you to continue paying creditors when you haven’t got enough money coming in.

The best way to set aside your savings is to put them in a business savings account. This allows you to set aside funds for dealing with cash flow problems. You’ll also generate some interest on your savings, potentially giving you some extra income. Which leads to the next useful cash flow tip...

Find ways to develop a passive/continuous income

If your income is unpredictable or you receive more work during certain seasons, it could be worth finding a way to bring some regularity to your income so that you can more easily budget from month to month. For instance, if your company sells ski equipment, you could struggle to make money during the summer months, leading to cashflow problems.

Seasonal lows may be able to be addressed by broadening your products or services. For instance, you could consider selling mountain biking or hiking equipment alongside ski equipment. 

Alternatively, you could try investing in savings and making a return off of them. This could include making interest off savings, making interest off of peer-to-peer lending, or even making a return off of stocks or property. By using this APY calculator, you may be able to forecast exactly how much money you’ll make over a certain period of time. Higher returns may involve making riskier investments. 

It’s also possible that you may be able to earn money by renting out office space or equipment while not in use. For instance, some companies sublet out spare rooms to other small companies or rent out printing services to other companies. 

You may also be able to make a passive income off of ad revenue or sponsorships by pouring energy into a business blog or vlog. If your blog or vlog is successful and you get a lot of readers/views, you’ll get paid money for advertisements and will likely attract the attention of sponsors. 

If you tend to live off of only a few large payments per year, you could consider promoting installment plans as a way of spreading out payments - this could allow you to budget more effectively than getting paid a large amount every few months. Alternatively, you may be able to promote subscription or continuous services over one-off services (if you own a cleaning company you could try to promote more regular office and house cleans as opposed to living off of one-off deep cleans). 

Organize payments to go out on the same day

Cash flow problems can also occur if your outgoing costs are difficult to keep track of. If you have different payments coming out at different points of the month, consider organizing all of these payments to go out on the same day so that you can more easily budget. You may be able to move payment dates simply by talking to creditors - while some creditors may want to stick with a certain date, most creditors will be willing to move the payment date if it prevents late payments. 

Avoid setting a large payment date a couple of days before you get paid. If you regularly get paid on a certain day, it may make sense to set your outgoing payments for a couple of days after this date.