Cash Flow Basics: 15 Ways to Fix Cash Flow Problems

Are you having trouble with cash flow? Cash flow problems are common now, but even in good times, many small businesses have difficulty managing cash. Here are 15 things you can do to improve your cash flow management.

Cash flow is a problem that plagues every small office from time to time. Even when sales are soaring, businesses can experience a cash crunch. What can you do? Here are some tips to get you moving in the right direction.

Get invoices out promptly

If you invoice clients, you’re not going to get paid until you send out the invoices. If you send out all your invoices on the 28th of the month, and your customers pay their bills around the 25th of the month, you’ll have to wait 30 days — or longer, perhaps — before they pay you. Speed up cash flow by sending out invoices as soon as you ship products or complete a job.

One way to do that is with the ZenBusiness Money app. It can help you easily send custom invoices, accept credit card and bank transfer payments, and manage your clients from an easy-to-use dashboard.

Catch credit problems early

It doesn’t matter how much you sell if you don’t get paid on time for your products or services. Keep an eye on aging accounts from existing customers. Don’t wait until they’re 6 months behind in payment to try to collect. Send out late notices if you haven’t received payment by the next billing cycle.

If a company that has normally paid on time still doesn’t pay, call to find out if there’s any problem with their order or with the service you’re providing. If they say no, ask when you can expect payment.

Offer a discount for advance payment in full

If you’re going to be working on a big project for a customer with deep enough pockets, offer a discount if they pay the full amount for the work before you start the project. Besides improving your cash flow position, the discount might help you land the deal to begin with.

Raise your prices

When you started your business, you may have priced your products or services on the low side as a way to attract customers, or because you didn’t realize what all your costs of doing business would be. Now, you have plenty of work coming in, but it may not be profitable. You may find that you have to work 80 hours a week to get the work done, or that your costs for supplies or raw materials have increased. Or, you may have expenses you hadn’t planned for, like the cost of payroll taxes for employees, a need to move out of the home and to rent office space, or a need for new equipment or more physical space to run your business.

If you’re in a situation like this, or if you’re still charging the same prices you did four or five years ago, raise your prices. You can’t operate a small business on razor-thin margins. By raising your prices, you’ll have more cash coming in, which can help tide you over slow periods or times when customers pay late.

Blame it on your accountant

Some clients, particularly those who were your first clients, may get annoyed when you announce you are raising your prices. They may believe you “owe them” for “helping you get your start,” and that your price increase is a betrayal.

If the customer is one you want to keep, one way to defuse the situation is to take the personal element out of it. Instead of arguing about why you decided to increase your prices, sympathize with the client and then attribute the decision to your accountant. You might say, for example, “You know, John, I really didn’t want to raise my prices. But my accountant said I had no choice.”

Most professional advisors will be happy to go along with you, as long as you tell them ahead of time and as long as it sounds like something they’d really recommend.

Take partial payments if necessary

Sometimes a good customer may have a temporary cash flow problem of their own.  If they can’t pay the full amount of the money they owe you, ask them to make regular smaller partial payments.

Work on retainer

One of the problems with self-employment is that income may vary drastically from month to month. When you wear all the business hats, the need to do the work often interferes with ongoing marketing. If you don’t market steadily, there will be times when no business comes in, and as a result, times when no money comes in. Under this feast or famine scenario, you may get $20,000 in payments one week, and then not get another cent for two or three months.

One way to even out the irregularities in cash flow is to seek clients who will put you on retainer, paying you a guaranteed amount of money each month. Retainers are usually set up so that you guarantee you will set aside a specific number of hours to do work for a client each month. The client pays that amount whether they use up all the time or not. If they go over the time, they pay an additional, hourly fee. If they don’t use up all the time, they lose it. The unused time does not accumulate from month to month.

Lawyers and accountants use arrangements similar to this. Public relations, computer consulting, and other businesses in which clients may need repeat attention are good candidates as well.

Get rid of dead inventory

Old inventory that’s not selling hurts your business in two ways: It ties up the cash you spent on acquiring the inventory and it takes up space. Get rid of dead inventory and free up cash by lowering the prices enough to entice customers to buy.

Teach employees to upsell and cross-sell

Increase your profits by increasing your average order size. To do so, train your staff to suggest related products or more expensive options for the product or service the customer requests. If you sell online, see if you can enable upsell and cross-sell features in your shopping cart.

Watch check clearance times

Money in the bank isn’t money to spend — at least not immediately. Your bank may take two business days or more to clear local checks. If your customers are out of state, or the dollar amount of the check is large, your bank may hold deposits for several days. To be sure when the money will be availble, ask your bank how long it will take the check to clear.

Accept credit cards to speed up cash flow

You don’t have to be a retail store to accept credit cards from your customers. Businesses and government agencies, as well as consumers, use credit cards to make a wide variety of purchases.

Instead of waiting 30 days, 60 days, or more to collect payment from your customers, you can get paid in two or three days by asking them to pay you with a credit card instead of having you bill them. You’ll have to pay a percentage of each sale to the credit card company, and possibly a monthly fee, but those expenses may be negligible when you consider the time and money you’ll save by not having to send out monthly statements.

This is a win-win arrangement. The customer can still string out payments, but you’re not on the end of the string. An added bonus: speeding up cash flow can help you speed up payments to your creditors, which may lower or eliminate interest payments you make on your payables.

Accept electronic payments

Don’t limit the forms of payment you accept to the traditional ones. There are numerous forms of electronic payment systems that businesses and individuals use today, so consider them. These include ACH payments (for business accounts), PayPal, and mobile payments. 

RELATED: Online Payment Solutions for Small Businesses

Shift your receivables to a finance company

If your customers don’t like to pay bills for your type of product or service with a credit card, or if the amount is too large for them to feel comfortable charging, look for finance companies that will offer loans to your customers. Again, you get paid now, the customer gets to string out payments, and you don’t have to go to the trouble of sending out monthly statements.

Get some of your money upfront

Don’t spend weeks or months working without pay. When you negotiate deals, plan to get at least a third of the money upfront if you are working on a long time project. If possible, spread the remaining payments so you cover all your ongoing expenses for the project.

If you don’t know your customer and it would be difficult to collect if they didn’t pay or if they never came to pick up work they ordered, insist on payment in advance. That way you don’t have a collection problem.

Check credit ratings before the sale

One of the best ways to avoid collection problems after a sale is to make sure the customer is creditworthy before the sale. Take the time (and spend the money) to do credit checks on new customers. If the credit check makes the customer look risky, ask to be paid upfront in cash.

Listen to the buzz in your industry, too. If you are unsure of the credit-worthiness of a business, try to find others who have sold to the businesses. Ask if they have had any trouble collecting, and if they have, don’t make the sale.

Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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