Last Updated on November 16, 2022
As a business owner, cash flow problems can be stressful. Paying rent, making payroll, and paying off debts all become even more taxing when your cash inflow is not as much as your expenses.
To help you improve your cash flow and worry less over your payables, we have put together this list of some of the best tactics to increase your access to cash. Read on to see our top tips.
10 Ways to Improve Cash Flow
- Offer early payment discounts
- Factor your invoices
- Send invoices quickly
- Charge a late payment fee
- Reduce inventory
- Choose to lease instead of buy
- Pay slowly
- Negotiate better payment terms
- Offer electronic payment options
- Increase your prices
Offer Early Payment Discounts
Early payment discounts, also known as quick pay discounts, are a great way to incentivize your customers to pay their invoices before they are due. Typical early payment discounts fall around 1-2% per invoice, which may not seem like much but can have a big impact for customers with large invoices due.
Quick pay discounts are a win/win for you and your customers: you receive cash sooner, and they receive a discount on the product or service they received. To get an idea of some common early payment terms, see the chart below:
|Early Payment Discount Terms||What Do the Terms Mean?|
|2/10 net 30||Customer receives a 2% discount if the invoice is paid within 10 days; if paid after the discount timeframe, the full amount is due within 30 days.|
|2/15 net 30||Customer receives a 2% discount if the invoice is paid within 15 days; if paid after the discount timeframe, the full amount is due within 30 days.|
|2/10 net 60||Customer receives a 2% discount if the invoice is paid within 10 days; if paid after the discount timeframe, the full amount is due within 60 days.|
|2/15 net 60||Customer receives a 2% discount if the invoice is paid within 15 days; if paid after the discount timeframe, the full amount is due within 60 days.|
Keep in mind that early pay discounts do not guarantee that you will receive payment sooner as some companies value having cash on hand more than receiving a discount.
Factor Your Invoices
Invoice factoring is an effective way to quickly receive cash without giving up equity or taking out a loan. Factoring is a type of alternative lending in which you sell your outstanding invoices to a third party (known as the “factor”) in exchange for a cash advance.
Once you’re approved by the factor, it typically takes between 24 and 48 hours to receive your cash advance (which can be up to 90% of the face value of the invoice that you sold). Once your customer pays the invoice, the rest of the invoice value will be given to you minus the factoring fees, which are typically between 1% and 3% of the face value of the invoice.
Because you can receive your cash advance very quickly compared to other forms of financing, invoice factoring is an excellent way to improve cash flow in a matter of days, not weeks.
Send Invoices Quickly
While you cannot control how quickly customers pay their invoices, you can control how quickly you send invoices to them. The countdown to the due date does not start until your customer receives the invoice, meaning the quicker you send the invoice out, the sooner you get paid.
To speed up your invoicing process, consider using templates and sending invoices electronically. Be sure not to put off invoicing though, as this just delays your payment, which can result in negative cash flow.
Charge a Late Payment Fee
If you are concerned about customers making late payments, charging a late payment fee can encourage them to pay on time. Late fees are typically charged in the form of interest, and each state has different laws about how much interest you can charge. Under law, you cannot charge late payment fees as an additional revenue stream or to punish customers. Instead, they should be used to make up for the costs incurred as a result of the late payment. Be sure to research your state’s laws surrounding late payment fees before including them.
Additionally, make sure you are upfront with your customers about your late payment fees. You do not want to surprise customers with these fees, which could result in losing their business. Be sure to charge a reasonable amount, and sometimes you may even decide not to enforce the late payment policy if your customer is going through a difficult time. At the end of the day, be sure to be fair in what you charge and how you enforce these fees.
A common culprit behind tying up working capital is inventory. While it is important to have inventory on hand to fulfill orders in a timely manner, having more inventory than necessary can slow your cash inflow.
To avoid tying up your cash in inventory, be sure to review your sales for seasonal patterns to better inform your inventory purchasing. Additionally, if you find that some items are not selling, it may be best to liquidate some of this inventory to free up cash. You can even sell these less popular items at a discount to entice customers to purchase them, which will improve your cash flow as you convert working capital to cash.
Choose to Lease Instead of Buy
It may seem counterintuitive to lease instead purchase capital-intensive items, such as equipment, as leasing often results in paying more in the long-run. However, for a business that is just getting started, leasing allows you to pay smaller amounts over a longer period of time, rather than making a large one-time payment. By spreading out these costs, you free up cash to be used for more pressing matters, such as payroll and other operating expenses.
See below for more benefits of leasing instead of buying:
- You have lower up front costs
- Lease payments usually come with a tax write off
- Lease contracts frequently cover maintenance
- You can more easily upgrade equipment (and avoid owning obsolete equipment)
You do not have to make payments as soon as you receive an invoice. Instead, review your invoices and take note of the payment terms to see how long you have to pay. Waiting until just before the deadline, rather than paying immediately, is a great way to keep cash on hand to pay your most urgent expenses.
Additionally, consider when your business most needs cash and try to plan your invoice payments accordingly. For example, if October is a slow month and you have an invoice due on November 5th, you may want to wait until the deadline to pay your invoice as cash flow may be slower leading up to the due date.
Negotiate Better Payment Terms
If you are paying your invoices slowly but you still feel tight on cash, you can try to negotiate better payment terms with your suppliers and vendors. For example, you can see if your vendors are willing to change their payment terms from net 30 to net 60, which would give you an additional 30 days to make your payments. Similarly, you can try to negotiate early payment discounts if it would be more beneficial to save money than to wait to pay.
Whether you want to extend your payment terms or try to get a discount, it is a good idea to always build positive relationships with your vendors and suppliers. The better your relationship, the more likely they are to work with your payment needs.
Offer Electronic Payment Options
Offering electronic payment options, such as debit/credit card payments and ACH bank transfers, can reduce the time it takes to collect invoice payments. Because electronic payments are easier (and quicker) than sending payments by mail, customers are more likely to pay early. Additionally, if you use an e-invoicing software, you can automate the invoicing process from invoice creation to collection, giving you time to focus on other priorities and making it easier for customers to pay electronically.
Increase Your Prices
Increasing your prices can be a long-term cash flow solution. While it can be daunting to charge customers more, sometimes it is necessary to improve cash flow and profit. By increasing your prices, you will bring in more cash for every purchase, but it is important to consider a few factors when exploring upping your prices:
- How much are your competitors charging?
- Does your current revenue adequately cover the costs of production/services provided?
- Will your sales drop significantly by increasing your prices?
- How much should prices increase?
- How do you communicate price increases to customers?
While there are a lot of considerations that go into changing your pricing, it can still be an effective solution to improve cash flow. Just make sure you come up with a clear plan prior to rolling out these changes.
Angela is the Director of Online Marketing at altLINE where she manages content production, marketing and sales operations, and digital PR. Angela joined altLINE in 2022 after several years of working in digital marketing across various industries including financial services and B2B. Angela loves creating content that helps readers better understand their financing options and helps them make informed decisions about factoring. Her work has been featured in publications like Search Engine Journal and Moz.