Negative cash flow is a sure sign your business is struggling.
5 min read
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One of the most important lessons I’ve learned as an entrepreneur is every business, regardless of industry, size or financial status, is dependent on cash. It doesn’t matter if your business is profitable; if you are consistently dealing with negative cash flow problems you’re struggling.
Related: Strategic Ways to Improve Cash Flow
A 2017 WePay SMB & Money Survey shows 41 percent of businesses report having experienced cash flow challenges and 16 percent have experienced payment fraud. Further, 56 percent said the emotional impact is “highly consequential or consequential.” Regardless of why you’re having cash flow shortages, there is a solution.
Here are five tips we’ve learned from working with partners and building our own online publishing business to ensure cash flow stays positive.
1. Manage invoices.
When I started, I was so dependent on developing a steady income that I had to make sure all of our partners were paying on time; as a result, I became smart about invoices:
Invoice reminders: Email reminders are a great way to get your customers’ attention. You can send gentle reminders a few days before the invoice is due, on the payment due date and, if necessary, after the account is past due.
Provide incentives: Consider using a carrot instead of a stick: Offer discounts to people who pay early. For example, if you use a Net 60 invoice system and want to encourage earlier payment, give a small discount to those who pay in the first few weeks after receiving the invoice.
Charge penalties for late payments: Create a firm policy to penalize late payments, and be explicit about this policy in your terms and conditions.
Be smart when paying invoices: If a vendor gives a discount for paying early, take advantage of it! If there’s no incentive to pay the invoice early, pay it whenever it makes the most sense to maintain good cash flow.
Invoice factoring: We’ve never used this, but it’s worth noting. Invoicing factoring involves selling your unpaid invoices to a third party in exchange for immediate cash. The factoring company charges a small fee for this service, often a portion of the invoice payment. The primary benefit is that you maintain positive cash flow without relying on the whims of unreliable customers.
2. Increase revenues.
It sounds banal to say “make more money,” but increasing revenue can create positive cash flow.
Increase business via marketing or sales programs. As an online publisher, my main growth lever was content marketing. The more content I published, the more traffic I would get, and subsequently, the more revenue I would earn. In the beginning, creating more content was strictly a time investment on my part. I was writing everything myself so a little sweat equity went a long way.
Add more services or products. As Merchant Maverick grew I expanded our product reviews across the point-of-sale and general small business product ecosystem. I had to hire some help of course, but I made sure I had the cash to fund the expansion. As a result, the more verticals we added the more partners we attracted.
You may find that you are not charging enough for your merchandise and/or services. It’s imperative to strike a balance between competitive pricing for your industry and fair compensation for your time and effort. When we grew enough to generate some leverage, we renegotiated deals with our referral partners to obtain a larger commission for each sale.
3. Be smart about how you spend.
Creating and maintaining positive cash flow requires more than just taking in more money. It’s just as essential to reducing the flow of cash going out in the form of operating expenses, bills and debt. There are many ways to cut costs, but here are a few options us and our partners have successfully implemented:
- Eliminate unnecessary expenses.
- Streamline business processes.
- Buy more efficient equipment.
- Ask suppliers for bulk rates and discounts.
4. Consider raising prices.
If your cash flow is consistently negative, one option is to increase the prices of your goods and services. Consider the following questions before raising prices:
- How much are my competitors charging for similar goods/services?
- How much time and labor is involved in producing and selling my products?
- Do my prices cover (and exceed) the costs of creating and selling my goods and services
5. Leverage money wisely.
Obtaining a business credit card, a line of credit or a small business loan can be a simple way to bring in more cash on a temporary basis, provided you can make the monthly payments. Of the three options, we’ve found the business line of credit the most optimal as you only make payments on what you spend. Of course, the best way to make sure money is available during rough times is to open a high-interest savings account and keep yourself a cash cushion. Research credit unions as they often offer a higher interest rate than banks.
Anyone of the above tips to grow sales, decrease expenses and gain capital will help you increase your cash flow. And maintaining positive cash flow is the foundation of a healthy business that will thrive and grow.