Unique Ways Small Businesses Can Increase Cash Flow

How to increase cash flow

A healthy cash flow is vital to a successful business. “Cash flow is the lifeblood of a business — it’s the movement of money in and out of your company,” explained Michael Dion, founder of F9 Finance. “Unlike revenue or profit, cash flow tracks when money actually hits or leaves your bank account.” 

Dion has seen countless businesses struggle, not because they weren’t profitable on paper, but because they ran out of cash when bills were due. “That’s why managing cash flow is just as critical — if not more — than managing profit margins,” Dion added.

The good news? Increasing cash flow can be surprisingly straightforward. If you can find an extra 10 minutes in your workday to carry out the following steps, you’ll be on your way to tackling the cash flow issues that trip up so many other businesses.

1. Incentivize customers to pay you promptly.

In a perfect world, customers pay in cash on the spot. In the real world, getting paid can take a while, and that delay can strain your cash flow. However, small business owners don’t have to sit idly by waiting for payments. You can strengthen your accounts receivable (AR) process by offering early-payment discounts to incentivize customers to pay sooner. Including easy payment options in your invoices also makes it easier for customers to settle up quickly.

“One tactic I’ve used is offering small early-payment discounts to customers who typically pay late — it costs a bit, but it’s often cheaper than borrowing,” Dion suggested.

Before you implement this strategy, make sure you can afford it. A discount that solves a cash flow problem shouldn’t create a profit problem.

2. Send invoices immediately.

Small business owners wear many hats. One minute you’re selling a product, the next you’re billing a customer, and the next you’re managing employees. With so much going on, it’s easy for invoicing to fall by the wayside, and that can hurt your cash flow.

The bottom line? The longer it takes to send an invoice, the longer it will take to get paid. Avoid delays by invoicing customers immediately after completing a sale or service. Many top-tier accounting software platforms offer automated invoicing features to help you get paid faster and more reliably. For example, our FreshBooks review highlights the platform’s instant invoicing tool, which can help ensure prompt payments.

3. Raise prices.

The cost of buying products, hiring workers, renting premises and more increases every year. If you keep your prices the same year after year, your profit margin will shrink and your cash flow will suffer. 

While pricing services and products can be tricky, try not to get stuck in a race to the bottom. If possible, increase your prices reasonably to accommodate your rising costs while staying competitive. Most customers will understand, especially if you’re upfront about why you’re increasing prices and by how much. 

4. Streamline inventory management. 

Proper inventory management is essential for preserving cash flow. Without it, you may order too much or too little. One way to streamline your inventory process is to integrate it with your point-of-sale (POS) system. Many of the best POS systems include inventory management tools and integrations that can help you track stock, set low-inventory alerts and automatically reorder items.  

You could also consider cashing in on your excess inventory to gain a capital infusion while freeing up space. “If you’re sitting on slow-moving inventory, it’s tying up cash — clear it out, even at a discount, and reinvest that liquidity,” Dion suggested.

5. Source additional suppliers. 

Sourcing everything from one supplier or a restricted range of vendors can mean you get inventory faster, perhaps at a discount. However, the supplier might go bust, causing you significant disruption.

Make it a habit to periodically explore new supplier options. You may uncover more competitive pricing or a broader selection of products. If you find a better deal, share it with your current supplier. They might be willing to match it to keep your business.

6. Consolidate your debt.

Cash flow management can be particularly challenging when you’re servicing high levels of debt, such as high-interest credit cards. Consider business debt consolidation to improve cash flow while still paying down what you owe. You’ll have one monthly bill at a lower interest rate. 

Many of the best business loan and financing options offer term loans you can use to consolidate debt and get yourself on sounder financial footing.  

7. Manage your accounts payable (AP) process.

Few things hurt cash flow more than losing track of your accounts payable and accounts receivable. We’ve already covered the importance of invoicing promptly and encouraging customers to pay faster, but it’s just as important to be strategic about how and when you pay your own bills.

“On the payable side, I always recommend negotiating terms with vendors when cash is tight,” Dion advised. “If you’re buying in bulk or [are] a long-term customer, you’d be surprised how flexible vendors can be.”

Diane Davidson, managing partner of Clever Fox Advisory, recommends reviewing vendor contracts and pricing at least once a year to ensure you’re getting competitive rates. “Track vendor performance and audit their POs and bills,” Davidson said. “So many vendors make mistakes on their billing, and it is the job of the customer to catch the mistake.”

Start by getting a clear picture of what’s coming in and going out. Track your bills so you know exactly what you owe and when — avoiding late fees and interest charges is key to preserving cash. When possible, negotiate better terms with your vendors or take advantage of early payment discounts to keep more cash on hand.

“Vendor discounts are pretty common, such as 2/15, which means a 2 percent discount if paid within the first 15 days,” Davidson explained. “If the vendor will not give a discount, you can ask to change the payment terms to longer, such as net 45 or net 60. This means that your payment is not due until 45 days or 60 days. By pushing out the due date, you can hold your cash for longer.”

8. Try crowdfunding. 

Crowdfunding platforms offer business owners a way to pitch their ideas to numerous small-dollar investors. If you need a capital infusion and have exciting ventures on the horizon, create a profile and build a campaign showcasing your concept to potential investors.

9. Use invoice factoring or short-term loans.

By selling your AR to an invoice factoring company, you could receive up to 90 percent of the value of an invoice within 24 hours of issuing it. You won’t have to wait 30, 60 or 90 days to receive a customer’s payment. Remember that factoring companies base their funding decisions on your customers’ creditworthiness. The better their credit score, the lower the interest rate you’ll pay. 

Keep the following information in mind if you’re considering using invoice factoring: 

1. The work you’re invoicing for must be complete. 
2. There must be no dispute or disagreement around the invoice.
3. You can only sell business-to-business invoices. 
4. Invoice factoring companies take a small fee, similar to a credit card processing fee. 
5. You get the balance of your invoice when the customer pays.

10. Ask for a deposit or upfront payment.

The idea of asking for a deposit or upfront payment makes many business owners and freelancers uncomfortable. However, it shouldn’t. You’re a professional providing something of value and committing time and resources to a client.

If you must buy inventory or hire expertise to fulfill a contract, determine the cost and ask for a deposit close to that amount to protect your cash flow. Consider spelling out your payment terms and project completion dates to reassure the customer.

11. Charge interest on late invoices.

Some states have laws that allow you to charge interest and late fees on unpaid invoices, subject to a maximum. While this is far from an ideal or especially profitable solution, it may deter some customers who regularly pay you late.

12. Understand your cash flow statements.

Cash flow statements help you understand how well you’re collecting money from clients and paying your bills, and can also highlight ways to cut costs.

When preparing a cash flow statement, monitor the following entries carefully:

• Opening balance
• Receipts from customers
• Payments to suppliers
• Operational income
• Taxes paid
• Interest earned
• Salaries and wages

13. Use an investment account to increase interest.

If you’re holding cash for a longer period (such as by pushing out the due date on vendor invoices), Davidson suggests keeping it in a money market or high-yield savings account (HYSA).

“Holding your money in an investment account that provides interest for your business is very important,” Davidson advised. “With high interest rates, it does not make sense to keep your money in a traditional checking or savings account, which is giving .025 percent interest when interest rates are 3.5 percent to 4 percent currently in an HYSA.”

Why it’s important to increase and maintain business cash flow

Davidson emphasized that cash flow is a key indicator of business health. “A healthy cash flow reserve, such as three to six months, will allow you to weather the natural downtimes in a business without having to take out a loan or debt to pay your monthly bills,” Davidson explained.

When you increase your cash flow, you bring your business the following benefits:

• More money to grow: Improved cash flow can help you open a new location or expand into a new market. A healthy cushion may eliminate the need for outside funding, or at least reduce how much you have to borrow. It also gives you room to experiment and make mistakes. As many investors will tell you, expansion always costs more and takes longer than expected.
• Better supplier relationships: Suppliers dislike late payers as much as you do. With more cash on hand, you can pay your vendors on time and keep supply chain disruptions at bay.
• More competitiveness: Companies with strong cash flow can invest more in marketing, product development and other growth initiatives, giving them an edge over competitors.
• Higher investor and lender confidence: A healthy cash flow is helpful if you want to apply for a business loan or persuade investors to back you. Banks and investors will see that your business is well-managed and has the systems and cash flow in place to repay their investment.

Dion noted that maintaining strong cash flow isn’t just about staying afloat — it actually gives your business leverage. “I’ve worked with companies that lost game-changing opportunities because they didn’t have enough cash on hand to move quickly,” Dion cautioned. “Good cash flow means you’re not scrambling for loans, you can invest in growth, and you sleep better at night. It’s the financial flexibility that separates businesses that survive from those that thrive.”

Danielle Bauter contributed to this article.