How Small Businesses Can Improve Cash Flow with These Simple Steps

Running a business, no matter how big or small, is not easy. There are plenty of challenges and not every business is the same or dealing with the same problems. There are a lot of things business owners like you need to consider depending on the industry you’re in. 

But when it comes to capital and expenses, it is more challenging for small businesses. This is why if you are managing or owning a small business, you must explore more ways to improve your cash flow, if you want to survive and thrive. In this piece, some of the experts from shared some valuable tips which can certainly help you grow your business:

Organize your books

From expenses to profits, you must ensure that your bookkeeping is up-to-date and straightened out. It helps you prevent overdue payments that could lead to higher financing fees from your creditor.

With organized books, you also get to see how your expenses are doing, allowing you to analyze which of the following should be prioritized or should be reduced. It would also help you identify your outstanding receivables, cash-in/cash-out for the month, operational expenses, net profit and many more.

Allowing yourself to identify unnecessary expenses through organized bookkeeping could help you increase cash flow.

Consider risk management

It is true what they say that “prevention is better than cure.” Before making any investment or transacting with new clients or suppliers, you must weigh everything, manage business risks––from its importance (ROI) down to possible exposure.

If you are dealing with a new client or vendor, it is better to vet them properly through credit checks. It is better to know the individual or business you are dealing with before you actually enter into an agreement with them. It helps you prevent potential problems in the future such as unpaid transactions or failed shipment or delivery of goods and services.

You also get to have more accurate forecasts in your business when you deal with individuals or companies that would successfully deliver on their end, whether they are customers or suppliers. 

Make sure that your credit terms line up

Credit terms with both suppliers and customers are often overlooked by smaller businesses. When this happens, your business is more exposed to deficits. Aligning your credit terms with different companies and individuals would also help you avoid a shortage of funds.

You can avoid having a messed up credit terms by checking every transaction you just signed and currently have. If there is a mess up, renegotiate your terms that would fit to your company’s capacity. You might also want to consider early payment discounts or rebates.

Avoid long-term payment options

If you can handle the expenses, it is better to pay them upfront or at least a large portion of it. It would save you a lot of money if you were able to avoid larger financing fees. It is also applicable to your customers. The longer you allow them to pay for something, you get slower returns, thus lower cash flow.

Also Read: Bookkeeping For Affiliate Marketing Made Easy

Consider automated payments

Missing payments usually mean larger interests from your creditor. It helps you avoid overlooking the payments that have to be made on a fixed schedule. Apart from your own expenses, you should also consider applying these to your customers. This way, they would also never miss a payment deadline and you are assured that you get paid on a fixed schedule that you are expecting.

Modern technology allows you, your customers and suppliers to make use of automation when it comes to financial transactions. Another advantage of automation is that you are able to double-check and confirm every transaction you made. You can also check them periodically if need be. Automation also helps you avoid overlooking any transactions. It is also less likely to be tampered with, which enhances not just security, but of your customers and suppliers as well.

Explore how you can minimize production expenses

Continue to research on how to minimize your costs––whether you are providing products or services. If increasing production would mean increasing your profit margin, then do it as long as you are able to afford it.

If there are unnecessary expenses when it comes to operations and production, analyze it. If you think your company can survive without it, then make the business decision to eliminate it. You could also consider looking for cheaper suppliers. If you think outsourcing a specific aspect of your operations would help you minimize your costs, then do it.

You know your business more than anyone else and if you are truly passionate about it, you would know what’s best for it as long as you are being logical in every decision you make. It is a never ending battle of pros and cons – which isn’t a bad thing.

Cost-Evaluation

Before diving into cost-cutting, understanding where money is going is a first step:

• Start by reviewing all production expenses.
• Identify which costs are fixed and which are variable.
• Get a clear picture of where most of the money is spent.

Example: A local bakery reviews its expenses and realizes that a major chunk of its budget is going towards buying premium quality nuts. It decides to find alternative suppliers to get a better rate without compromising on quality.

Budget Management

Having a budget in place can ensure that spending remains in check:

• Create a detailed budget that outlines all anticipated costs.
• Compare actual expenses to budgeted amounts regularly.
• Adjust the budget as necessary, taking into account any unforeseen costs.

Example: A small furniture manufacturing business creates a budget that outlines the cost of wood, labor, and transportation. By doing a monthly review, they can see when actual costs exceed budgeted amounts and adjust their purchasing and scheduling accordingly.

Negotiate with Suppliers

A big part of production costs comes from materials and services provided by suppliers:

• Negotiate terms with existing suppliers for better rates.
• Look for alternative suppliers who can provide materials at lower costs.
• Consider bulk purchasing to benefit from discounts.

Example: A clothing brand negotiates a deal with its fabric supplier for better rates by committing to purchase larger quantities over a longer term. This negotiation lowers the cost per unit of fabric, thus reducing production expenses.

Reduce Waste

Cutting down on waste can significantly lower production costs:

• Monitor and measure waste within your production processes.
• Look for ways to reuse materials.
• Educate your staff on the importance of reducing waste.

Example: A paper manufacturing company starts a recycling program to reuse waste paper in production. The recycled materials significantly reduce the need for new raw materials, thus lowering costs.

Optimize Operations

Streamlining operations can lead to substantial savings:

• Evaluate the production process for any steps that can be eliminated or combined.
• Use technology to automate repetitive tasks.
• Keep the workplace organized to save time and reduce accidents.

Example: A car repair shop invests in modern diagnostic equipment that quickly identifies problems, saving time, and ensuring that mechanics can focus on repairs instead of spending time on identifying issues.

Energy Efficiency

Lowering energy consumption is a direct way to reduce production costs:

• Switch to energy-efficient appliances and machinery.
• Implement energy-saving practices like turning off equipment when not in use.
• Consider alternative energy sources like solar power.

Example: A pottery studio replaces its old, inefficient kiln with a newer, energy-efficient model. The new kiln uses less energy to maintain the required temperatures, thereby reducing the studio's electricity bill.

Invest in Training

Well-trained staff can contribute to cost-saving in many ways:

• Ensure staff are well-trained to operate machinery optimally.
• Cross-train employees so they can cover multiple roles, reducing the need for overtime or additional staff.
• Promote a culture of continuous improvement and encourage employees to suggest cost-saving ideas.

Example: A coffee shop trains its employees to manage multiple roles - from being a barista to handling the cash register. This cross-training reduces the need for extra staff during busy or understaffed times.

Preventive Maintenance

Keeping equipment in good working order can prevent costly breakdowns:

• Schedule regular maintenance checks.
• Fix issues as soon as they arise to prevent bigger problems later.
• Keep a log of maintenance activities for each piece of equipment.

Example: A small brewery schedules regular maintenance checks on its brewing equipment. By replacing worn out parts before they fail, the brewery avoids unexpected breakdowns and keeps production running smoothly.

Quality Control

Maintaining high quality can prevent costly mistakes and returns:

• Implement a robust quality control system.
• Train employees on quality standards.
• Address quality issues promptly to prevent further costs.

Example: A toy manufacturer implements a quality control system that catches defects early in the production process. This early detection reduces the number of defective products and lowers the costs of returns and rework.

Utilize Technology

Modern technology can offer solutions for reducing production costs:

• Use software to monitor and analyze production processes.
• Automate inventory management to keep stock levels optimal.
• Utilize online platforms for better communication and collaboration among staff.

Example: A local grocery store uses software to manage inventory levels, avoiding overstocking and understocking issues. This automation reduces holding costs and ensures that popular items are always in stock.

Explore Outsourcing

Outsourcing can be a viable option for lowering expenses:

• Look for tasks that can be outsourced at a lower cost than in-house production.
• Evaluate the cost-benefit of outsourcing certain functions.
• Ensure the quality standards are met by outsourced vendors.

Example: A tech startup decides to outsource its customer support to a specialized firm. By doing so, the startup is able to offer 24/7 support without the expense of hiring and managing a round-the-clock in-house team.

By examining each area of production and implementing cost-saving measures, companies can notably lower their production expenses. Through a mix of negotiation, waste reduction, optimization of operations, and strategic use of technology and outsourcing, lowering production costs is an achievable goal.