My name is Evan Carmichael and I help entrepreneurs.
Today we’re continuing our Financial Literacy Series as we look to help entrepreneurs with specific questions about their financial information.
My last post with over 2,000 stumbles was What is the Role of the Balance Sheet?
Today I’m going to look at 15 ways that you can improve your short-term cash flow.
If you’re struggling to pay your bills and are in a cash crunch, here are 15 ways to help get out of it.
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1. Have a Sale
One of the fastest ways to bring in immediate cash flow is to have a sale.
Have it for a limited time only so people are forced to buy now or they’ll miss out.
Make sure, however, that you don’t mortgage the future just to bring in some quick money.
Although you’re giving a price discount, it should still be profitable for you or you’re going to run into even bigger problems down the road.
2. Cross Sell / Up Sell
The easiest people to sell to are your current customers.
They know you, like you, trust you, and love working with you.
Instead of spending so much time finding new clients, selling more to people who have already bought from you is a fast way to improve your cash flow.
You can either sell greater quantities of your current offering (ie. buy 2 of my hats instead of 1) or sell related products and services to complement your offering (ie. buy 1 hat and also buy a pair of gloves).
A simple email or phone campaign to current customers with a hook should have your cash registers ringing in no time.
3. Look at Your Accounts Receivable
Here’s a sample Collections Report from QuickBooks Online.
It will tell you who owes you money, how much, and how when they were supposed to pay.
In this example, the company is owed almost $9,000 and the invoices are 38 to 126 days overdue!
It’s time to start calling on these companies more aggressively to make sure they pay their bills.
You want to maintain a good relationship with your clients but you’re also running a business, not a charity and bills need to get paid.
For future clients you may also want to run a credit check on them before you extend any kind of terms to them.
4. Give an Incentive to Pay Early
Some clients might have a policy of only paying after 60, 90, or 120 days.
The bigger the client is, generally the more you have to wait to get paid.
One way to flip this around is to offer an incentive to pay early.
Depending on what your margins are and how badly you need the money, you can give a discount (say 2-5%) of the invoice if they pay right away instead of waiting.
Some customers will take you up on it because it also helps them and it puts money into your pocket immediately.
5. Make Sure You Invoice on Time
A lot of entrepreneurs are so busy running their businesses and trying to get new customers that they put off administrative tasks like invoicing.
The longer you wait to invoice, the longer you wait to get paid!
As soon as you’re able to, invoice your client so you can get your money as quickly as possible.
6. Change Your Billing Structure
Try as much as possible to get the money up front and deliver the products or services afterwards.
For example, when I work with clients I use a retainer system.
They hire me for a project which may include work for up to 6 months or a year.
I’ll bill them up front for the entire project and then deliver according to the schedule we set up.
If you’re selling a product, think about offering some kind of subscription model where they pay in advance for a year and they get a certain quantity every month.
You can consider offering a slight discount in exchange for them making a long term commitment to you and paying you up front.
7. Accept Credit Cards
Sure there are credit card fees that you have to pay but there are some major advantages to accepting credit cards as a payment option.
The first is that you get the money quickly – either instantly or by the end of the day.
Customers are also more likely to spend more money when they pay by credit card compared to when they pay cash.
You might be saving a little bit by not using credit cards but you’re also probably leaving a lot of money on the table.
8. Factor Your Receivables
If you have significant money owed to you it’s possible to sell the receivables to a factoring company.
They’ll give you a % of the total amount in return for you getting immediate cash.
Typically the larger your clients are the greater % you’ll get because it’s less of a risk for them to take on.
Factoring generally is still expensive – I’d only recommend using it as a last resort.
9. Sell Excess Inventory
If you have inventory that is just taking up space, try to sell it off for a quick cash injection.
You may not turn a large profit on it but if it’s not being used then the best value you may get from it is to trade it for immediate cash.
Note: I wouldn’t recommend doing this for inventory that you’re going to use in your business.
Selling inventory that you will eventually need at a steeply discounted price will have a long-term negative impact on your business.
10. Negotiate Terms with your Suppliers
This, in theory is a good idea and textbooks will tell you to do it.
The idea here is to look at everyone you owe money to (your suppliers) and try to delay your payment to them for as long as possible.
It makes sense because if you’re delaying when money goes out, you’re improving your short-term cash flow.
Here’s why I don’t like this strategy: it can sour your relationship with your supplier.
You want to count on your suppliers for quality products and services.
If you’re in a bind and need something quickly you want to know that your suppliers have your back.
Do you think they’re going to give you their very best and bend over backwards for you if you’re stretching them out on when you pay them?
Think about it – if they’re a small business owner then they likely have cash flow concerns as well and are looking at their accounts receivables (you!) for some relief.
If it’s a big company then get the best terms you can but if it’s a small company I’d be very hesitant in negotiating terms.
In my business I pay my suppliers as soon as they invoice me.
I pay ahead of when they’re expecting with no discount because I want the best from them… and I get it!
11. Create a Referral Program
Another great way to boost cash flow through sales is to ask for referrals from your existing clients.
Again, they like you, know you, trust you, enjoy working with you… maybe they know someone else who could also benefit from what you do!
You could create an elaborate program with incentives or just call up your best customers and take the out for lunch to ask for their help in thinking of other people who might be a client for you.
It really depends on the customer – some love recognition and others just do it because you asked them to.
Either way, getting new clients in the door is a great way to improve both the short term and long-term cash flow of your business and referrals are one of the best ways to get ideal clients on board.
12. Refinance Short Term into Long Term Debt
The people you owe money to want to get paid back and for that to happen you still have to be in business.
Talk to your lenders to and see if there’s a way to negotiate a better deal.
In particular you’re looking for ways to move the short-term debt (money that’s owed within the next year) and convert it to long-term debt (money that’s owed beyond one year).
This will give you some cash flow relief that you can use to hopefully continue growing your business.
13. Sell and Leaseback
Another creative way to improve your cash flow is to look at your fixed assets and see if there’s anything you can sell and then lease back to the business.
This works particularly well with expensive assets like land and buildings.
The idea is to sell your asset to a company which gives you immediate money but then you create a lease arrangement where you pay an ongoing fee for the right to use the asset.
It will increase your regular payments out but gives you a monetary injection that you can use to help solve an immediate cash crunch.
Note – you can only do this once!
14. Convert Debt to Equity
This is an even more creative option and one you should really only use if you have a good relationship with the people you owe money to.
The idea here is take the people you need to pay and swap the amount you owe them for equity in your business.
You give them a piece of your company and they erase the debt.
You’ll have to figure out how much you think your company is worth as well as how much you’re going to give up to them.
More importantly you’ll want to really ask yourself if you want this person to be a part of your business long term or not because the last thing you need is a minority shareholder who adds no value and causes problems for the company.
It’s not my favourite option but it is an option so I wanted to share it with you.
This is my top suggestion of all – bootstrap.
I hate spending money until I’m making money.
Anybody can spend money but it takes a lot of effort to learn how to make it.
If you have a goal to accomplish and you think you need $x to do it, find a way to start smaller and without spending any money.
Prove to yourself that you can make a little bit of money just by putting in your time.
Then when you know how to make money you can spend money to expand.
It’s good money to invest because you know it’s going to work – you’re just expanding on what you’ve already shown is effective.
It’s hard work and takes a lot more time but will help ensure that you’re building your business the right way.
Don’t spend until you earn!
What do you think?
Do you have a cash flow problem? What have you done to solve cash flow issues in the past?