3 Ways to Fix Cash Flow Problems in Your Business

If your business constantly feels short on cash—even when sales are healthy—you’re not alone. Cash flow problems are one of the most common financial challenges facing small and mid-sized businesses. Here are some common causes of cash flow problems and strategies to improve them. Here’s why profitability doesn’t guarantee cash flow and some practical steps to improve it.

Why Profitability Doesn’t Equal Cash Flow

One of the most common misconceptions among business owners is that profitability guarantees financial stability. In reality, a company can be profitable on paper and still struggle to pay bills. This happens because profits are recognized when revenue is earned—not when cash is received. Without careful cash flow management, that timing gap can become a serious problem.

Methods for Improving Cash Flow

Cash flow challenges typically develop over time due to factors such as delayed receivables, inadequate cash flow planning, rapid growth, and poor expense management. The good news is that cash flow problems are often fixable with the right approach. Here are a few steps your business can take to help improve cash flow.

1. Accelerate Accounts Receivable

Invoice earlier when possible. Unless you operate a retail business, most receipts for sales or services are issued after the sale occurs. It is common to have partial billings on large jobs or when the job will take a protracted period. Consider using some event or milestone as a trigger for an invoice. This could be passing a design review, completing a critical test, or receiving a large amount of material. If negotiated into the sale, these events may authorize you to issue an invoice before the job is fully completed.

Set clear payment terms. Your customers are trying to optimize their cash flow just as you are. In the sales process and, certainly, on the invoice, state the payment due date. Whether it is the common 30 days or a 1% discount for payment within 10 days, customers are more likely to respond to specified dates and terms. Sales to poor-credit customers should be on a cash-on-delivery (COD) basis. Once the payment date is established in your contract, you have a legally enforceable document.

Enforce late payment penalties. As Oscar Wilde said, “Nothing focuses the mind like the sight of the gallows.” Customers respond, and your chances of collecting interest from delinquent accounts improve with a stated policy.

2. Negotiate Terms and Take Advantage of Early Payment Discounts

Holding on to your money for as long as possible improves your operating cash flow and allows you to earn interest on your funds. With major suppliers, it may be possible to negotiate a more flexible payment schedule. They want your business and are often willing to offer payment terms, especially if the materials you are buying will be used over an extended period. Approach the supplier when placing the order; they are more willing to consider payment terms before they receive your order.

As a customer, you may be eligible for a prompt payment discount. While the practice has become less common, some organizations still offer a 1% or 2% discount if their invoices are paid within a shorter period. A 1% discount for payment within 10 days equates to a 36% annualized return on your money. If your cash flow allows it, taking advantage of prompt payment discounts may be the best return on your investment.

3. Put Excess Cash to Work

You should make sure you are earning as much as possible on your excess cash balances. While certain banking laws may restrict paying interest on commercial accounts, you should at least check with several banks to learn their policies. Some banks offer sweep arrangements that automatically move amounts above a minimum into an interest-bearing account.

Maximize Your Time and Cash Flow

Cash and time are two of your most precious resources. Spending some time setting accounts receivable policies, negotiating payment schedules with vendors, and finding the right accounts for your cash will help you maximize both. Contact us today, and we’ll help you organize your finances to maximize cash flow efficiency.