cash flow

Tips for Small Business Owners: How to Fix Your Cash Flow

Traditionally, the first three months of any year is the time when many companies that provide services or goods on credit terms will face difficulties with their cash flow. With staff on leave, generous bonuses paid out at the end of the previous year, and clients less than enthusiastic about paying what is owed according to agreed terms can all add up to a negative effect on a company’s cash flow. During the first quarter of the year, it’s not unusual to see a spike in delinquent debtors, particularly for companies whose clients operate in industries that are typically shut down over the festive period. If your business has found itself in this position, we’ve put together some top tips that you can use to improve cash flow.

#1. Consider Borrowing

The easiest way to deal with cash flow issues quickly is to borrow extra capital to cover the shortfall. There are several different options that you might want to consider, but ultimately, it will come down to the amount of cash that you need to raise in order to maintain a positive cash flow. It could be as easy as using a business credit card for certain purchases for a couple of months or asking your bank for an extension on your business account’s overdraft.

Small business secured loans emerge as a potent solution in such scenarios, providing substantial capital against an asset collateral. These loans not only cater to immediate financial needs but also carry lower interest rates due to their secured nature, making them a cost-effective tool to manage cash flow effectively.

If you have a business loan from your bank, you may be able to increase it if you have a proven track record of making repayments on time. Alternatively, some small businesses are able to take out loans from the US Small Business Administration (SBA). SBA loans could be a good option if you need the extra cash flow to help grow your small business.

#2. Chase Up Unpaid Invoices

Invoices that haven’t yet been paid are one of the biggest causes of cash flow problems, particularly at beginning of the year. The sooner you get in touch with the clients who have not paid their invoices, the easier it will be for you to get your cash flow back on track. Bear in mind that during the beginning of the year, certain clients may be legitimately struggling to pay, particularly if they operate in an industry that closes down over the Christmas period. So, it might be worth coming up with payment plan ideas to make it easier for them to pay what they owe. This way, you will at least be able to get some of the cash that you need.

#3. Get Documents in Order

So many businesses don’t get paid on time due to small errors in documentation that is unorganized or, even worse, non-existent. Make the New Year the time to go through all business documentation meticulously and look for mistakes such as incorrect purchase orders, improper credit agreements, missing contracts, invoices that have been incorrectly captured, and delivery notes that have gone awry. It’s certainly worth looking into using an online invoicing system; this will ensure that all invoices are as error-free as possible and sent to the relevant clients immediately.

#4. Intervene with Non-Paying Clients Sooner

It can be easy to believe a client who usually pays on time when they announce that they’re going to be a little late this month, but what about clients who consistently don’t pay what they owe on time? If a client owes you money on an account that’s aged to 120+ days, it’s usually safe to assume that whatever you’ve been doing up until now to recover the amount isn’t going to work. At this point, if not even sooner, it’s best to hire a credit recovery expert to help you get back as much of the money as possible.

#5. Vet Your Debtors

According to the experts, the liquidity of a company is largely determined by debtor quality. Building your business on low-quality debtors can lead to dreadful cash flow results. Taking the time to vet potential clients, who will become debtors in the future, is crucial for ensuring that you avoid cash flow issues in the future. A good quality debtor is an individual or company that has a good financial reputation and where there is no history of non-payment or late payment. If you are going to be providing goods or services to your clients on credit terms in the future, the best way to ensure this is to run a credit check before coming to an agreement.

#6. Fix Profitability

Last but not least, it’s important to look at just how much profit your company is making and fix any issues you uncover. Businesses with huge turnovers but low profitability tend to require continued capital and financing, which adds to expenses and has a detrimental effect on cash flow. In these circumstances, it can often be better to slow down sales and focus on making more profit if that is a realistic option for the company.

Did you find these tips helpful for improving business cash flow? We’d love to hear from you in the comments.

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George Meszaros is the editor and co-founder of Success Harbor where entrepreneurs learn about building successful companies. Success Harbor is dedicated to document the entrepreneurial journey through interviews, original research, and unique content. George Meszaros is also co-founder of Webene, a web design and digital marketing agency.