No business owner, especially a small business owner, is free from worry about cash flow.
Given the meltdown the stock market has experienced recently resulting from the spread of COVID-19 throughout the United States and globally, finances are especially concerning right now for small business owners.
One bright spot is the finding of a recent Kabbage survey that reveals small business' revenue growth is stronger than what business owners perceive.
"We compared the growth of more than 600 survey respondents to the Kabbage Small Business Revenue Index, which aggregates the anonymized revenue data of more than 220,000 U.S. small businesses," said David Snitkof, head of analytics and data strategy for Kabbage.
What Kabbage found is that "survey respondents perceived their revenue growth to be lower than other companies like them when, in fact, 74% of respondents in the survey met or exceeded the overall index revenue growth."
How can small businesses increase cash flow?
The Kabbage data is encouraging; businesses, however, should always be looking for ways to increase cash flow. Here are six unique ways to do that:
1. Collect receivables before payables are due.
Sales drive up receivables, but that doesn't matter if invoices aren't paid by the time your bills come due.
"Sales can be increased by offering customers incentives," said Calum Coburn, B2B global negotiation expert and accountant. "In order to also improve cash flow from these additional sales, a business can offer customers discounts if they pay their bills ahead of time."
"It's important for small businesses to track the timing of expected cash flows," said Snitkof. "This includes … movement … from bill payments to daily sales and the time it takes for deposits to settle. It's all about balancing the money coming in and the money going out to keep operations moving forward as the business grows."
Coburn said it's important to know how advance payments impact cash flow.
"An increase of advance payments is a decrease in cash flow and working capital. Prepayments mean less cash available for income-generating investments and immediate expenses. Buying goods or services on account results in an increase in cash flow. This is due to the company receiving goods or services now while only having to pay in the future."
2. Build authentic relationships with customers.
"When it comes to the journey of creating, growing and maintaining a business, success is defined by the strength of your relationships," said Katie Bishop, author of The Best Seller.
How do you build lasting relationships with customers?
"Start by fully recognizing the value that others bring to [the] organization, and invest in them accordingly," said Bishop. "With this perspective comes an element of generosity and sacrifice that is practiced both internally and externally. Genuine relationships create cash flow, meaning lower turnover, loyal customers, referrals and just a great organization overall."
3. Crowdfund.
Crowdfunding platforms offer businesses a means through which they can pitch their ideas to a large number of small-dollar investors. One crowdfunding platform helping small business owners gain access to capital is StartEngine. Business owners can create a profile and build a campaign showcasing their idea for potential investors.
4. Investigate revenue-based funding.
Securing venture capital funds isn't easy, especially for small business owners. Some business owners are looking to alternative methods, such as revenue-based funding. One company to offer this type of funding is Seattle-based Lighter Capital. Lighter Capital provides money upfront in exchange for a percentage of future revenue. Payments are based on monthly cash flow, which allows business owners to only pay what they can afford.
5. Utilize invoice factoring or short-term loans.
Invoice factoring, explained Coburn, is a type of debtor finance where a business sells its accounts receivable to a third party.
"With invoice factoring, the company can convert its receivables into immediate cash," Coburn said. "That way, the business doesn't have to wait 30, 60 or 90 days for customer payments. A factoring company bases its funding decisions on the creditworthiness of the business's customers."
On the other hand, how much you can get as a short-term loan depends on the creditworthiness of the business.
"Invoice factoring has the additional benefit of managing the collections process and credit control," said Coburn. "Short-term loans have the benefit of fixed interest rates, which are typically lower overall in cost than the charges associated with invoice factoring."
6. Understand your cash flow statements.
"In the simplest form, small businesses are adding up all the money in and out of the company, and tracking it under different categories (e.g., sales receipts, payroll, rent)," Snitkof said. "However, all businesses ‒ and their cash flow statements ‒ are unique."
Coburn gave these examples of cash flow entries:
- Opening balance
- Receipts from customers
- Payments to suppliers
- Operational income
- Taxes paid
- Interests earned
- Salaries and wages among other cash-based transactions
"A cash flow statement may also include noncash entries if prepared under generally accepted accounting principles," Coburn said. "The difference between total inflows and outflows is called net cash flow."
The importance of strengthening small business cash flow
Improving cash flow has more benefits than just being able to afford goods and services and paying your employees.
"Cash flow is the oxygen of business," Snitkof said. "All companies strive to reach profitability, but it takes time to calculate cash flow trends to prevent shortfalls before they happen or identify opportunities to invest. It's important to maintain an appropriate cash cushion to guard against temporary challenges, such as an invoice taking longer than expected to get paid. The challenge is that businesses have to analyze multiple accounts which are often siloed and unconnected to understand their cash position. It's a time-intensive process that is ripe for technology to solve."