25 Tips to Improve Cash Flow in a Crisis
Written by David Luther, Senior Content Writer - NetSuite
Positive cash flow is essential for growth, so it’s important to keep it coming. In fact, managing cash flow is about managing expenses and operations as much as sales.
Efficient cash flow is so important that one of the top reasons most businesses fail is because they don’t have enough cash on hand when they need it. So, when you find your business in the midst of a crisis that challenges your business continuity plan, how do you go about improving cash flow?
Here are 25 practical tips to help improve cash flow and get operations on the right track during a crisis by optimizing how to get paid, manage operational expenses and refocus your sales and marketing.
HOW CAN YOU INCREASE MONTHLY CASH FLOW?
- Send out invoices as soon as possible
Simply put, companies need to send invoices if they want to receive payment. Be consistent with invoicing, setting clear expectations by sending them out at the same time each month. If the process is manual and becomes onerous and leads to delays, consider switching to an accounting software solution that can automate it.
Unfortunately, sending an invoice doesn’t necessarily equal a payment, and cash flow problems can come from late or absent payments. Just getting invoices paid on time — or earlier — is another effective way to increase cash flow.
- Give customers more payment options
Don’t make the payment process more difficult for customers than necessary. Instead of just taking card payments, think about offering online payments and auto-deduct options that will encourage cash payments.
- Send invoice reminders
Set up email reminders a few days before they’re due, when they’re due and again when they’re past due; many accounting software solutions can automatically send invoice reminders.
Even if it’s uncomfortable, it may be necessary to pick up the phone and give late-paying customers a call — just make sure that they actually received the invoice first. Conducting those calls can be a skill unto itself. Consider finding someone in the organization well equipped to handle it or helping an employee develop it.
- Incentivize early invoice payment
Customers are looking to cut costs too, so consider giving a discount to customers who pay their invoices early. If payments are due 30 days after an invoice is sent but you want them to pay earlier, offering a discount for payment within the first week can increase cash on hand. Another option is to offer discounts on products or services for customers who routinely pay early.
- Ask for deposits on custom orders
Require deposits for custom products or unusually large orders to avoid the risk of a financial loss in a crisis, particularly for one-of-a-kind orders that have less value to another customer.
Be sure that customers understand the policy and include language in the contract.
- Penalize late payments
Late payment penalties encourage customers who are trying to increase their own cash on hand to prioritize your invoices — but be clear about the penalty, how much will be charged and when it will be charged.
- Turn to invoice factoring
If tightening payment terms doesn’t improve cash flow, consider invoice factoring. Invoice factoring is essentially when a business sells unpaid invoices to a financing company (the factor) for an immediate percentage of the value, usually around 80%.
The advance is paid off as the factoring company collects on the invoices, takes a set percentage fee and gives the business the remaining amount.
- Contract with a collection agency if needed
There comes a point when pursuing past due accounts receivable and maintaining relationships with delinquent customers won’t be worthwhile.
This is when you should consider a third-party collections agency, who usually take a set percentage of the collections or purchase the debt outright. Some payment is better than none.
HOW CAN OPERATING CASH FLOW BE IMPROVED?
- Update payroll processes
First, switch to direct deposit over paper checks. The time between when companies cut checks and when employees deposit and banks clear them can impact cash flow.
Also, switch from “bi-weekly,” paid every two weeks, to “bi-monthly,” paid twice a month on set days. They’re similar, except that two months of the year a bi-weekly pay schedule will result in three paychecks going out — some businesses have had to borrow or finance payroll in these months.
- Take an inventory check
Be objective about products and services, and don’t continue to tie up resources in goods that aren’t moving — even consider selling them to bulk discounters or offering bundled discounts to free up cash. This is especially important when operating in an industry where product lines improve or change regularly.
Look at sales patterns and reconsider stock levels, adjusting orders to account for busier times. Unnecessarily ordering the same amount of inventory each month contributes to excessive inventory and ties up cash.
- Delay vendor payments as long as possible
Deferring payments to vendors for as long as possible while still staying within payment terms can slow the outflow of cash, especially if there is no late payment fee.
But it’s important to keep up a good relationship with vendors, so make sure to respond to the ones who contact you about any late payments. Explain the reasons for paying the invoices late and try to work out an acceptable arrangement for becoming current.
- Review agreements with vendors
Periodically review terms to make sure agreements are still competitive in the current market. Similarly, free up more cash by asking vendors if they can rely on your relationship or credit history instead of putting down deposits on orders.
- Renegotiate credit options if possible
When interest rates are low, it’s time to review any existing lines of credit to see if you’re eligible for extended terms or lower interest rates. It may also be a good idea to add an additional line of credit for emergencies.
During and after economic crises, the government may create programs to facilitate lending to small businesses as a form of stimulus, so be aware of any programs that might benefit your business.
- Explore an accounts receivable line of credit
Accounts receivable balances are considered a current asset on the books and many banks are willing to lend up to 80% of the balance’s value, collateralizing the loan by the accounts receivable. This can make cash available at the time of the loan, instead of waiting until the account is paid.
Keep in mind that the amount available will vary as new accounts are added to the loan and old accounts are paid down.
- Use cash to save cash
During a time of economic uncertainty, your business won’t be the only one looking to build up its cash reserves. If vendors offer deep discounts for cash that justify tapping into your reserves, take advantage of it.
HOW CAN SALES AND MARKETING IMPROVE CASH FLOW?
- Offer subscription sales for routine purchases
If customers are buying products or services on a regular cadence, consider setting up a subscription sales cycle where they prepay. This has the dual benefit of securing future sales and also securing payments upfront for future costs.
- Reevaluate your pricing
It may seem risky for sales, but periodically review your pricing and consider increasing what you charge — you won’t know what the right number is until you find it. Don’t undersell your product — try to strike a balance between competitive pricing and being realistic about how much it costs to offer your service or product.
- Check your customers’ credit scores
If customers won’t pay in cash, check their credit history before conducting business. The sales team might be eager to close the deal, but a customer or client with a poor credit history is not likely to make payments on time and hurt your cash flow — but set it up with a higher interest rate if needed.
- Reevaluate your marketing
If it makes sense for your line of business, explore e-commerce solutions. There can be costs associated with the implementation process and personnel, but the increase in sales may quickly offset it.
If the business already has an online presence, look into online advertising and email marketing, which can help both acquire new customers and upsell to current ones.
- Leverage your happy customers
An easy way to find more customers is to create a referral program, offering a discount or credit for customers who send new business your way.
HOW DO I IMPROVE CASH FLOW IN A TIME OF CRISIS?
- Consider ad hoc arrangements to get payments in early
Even if customers are already on a cadence, consider contacting big customers and offering them an incentive to pay at, say, 20 days if they’re currently paying at Net-40.
- Appeal to your vendors
This isn’t a “business as usual” time for companies anywhere. Vendors and landlords understand that this is a difficult time, so try appealing to them to see if they have any discounts or can relax penalties for late payments.
Similarly, consider including some flexibility of your own when it comes to working with customers experiencing difficulties, depending upon the relationship you have with them. Preserving that relationship and eventually receiving the full amount after the crisis passes may be the better business decision.
- Be flexible with new sources of revenue
If there’s a product or service available that requires little cash outflow but isn’t already a major stream of revenue, try to find ways to build the volume. Can you offer an additional service that costs you little to provide, like installation or maintenance? Can you rent out space in a property you own? Be creative with new sources of income.
- Take on debt to weather the storm — if it makes sense
This comes down to knowing your business, but if you expect for operations to return to normal in two months, or even six, it might make sense to draw down on your line of credit while interest rates are low. This may make sense if it preserves your revenue streams and lets you make it through the crisis.
But, it can put businesses in a much worse financial situation after taking this type of loan than before it, so don’t make this decision hastily if you aren’t confident that the revenue will come back after the crisis.
- Be objective about unnecessary expenses
Before looking at cutting salaries or laying off employees, look for expenses you can quickly trim and ask if they’re necessary or have cheaper alternatives.
Review software licenses. If you haven’t already, restrict employee travel. Cut non-essential contractors, if it doesn’t overburden employees or impact your business. Reel in perks like company lunches; it might be time to limit the offerings in your company kitchen.