Managing business capital effectively is essential for maintaining smooth operations and enabling growth. Cash flow—the lifeblood of any organization—can be unpredictable, especially for small and medium-sized businesses. To safeguard your financial health and prepare for opportunities or challenges, adopting efficient cash flow practices is critical. This guide provides 15 actionable strategies to help you improve cash flow, reduce expenses, and prepare for potential financing needs. Each point will hopefully provide a practical framework for making better financial decisions.
1. Monitor Cash Flow Regularly
It should go without saying that a business owner should monitor cash flow. But cash flow monitoring is not a periodic task—it’s a daily discipline. Accurate visibility into your cash position allows you to make informed decisions and avoid unnecessary surprises. Insight is the first step to action. Start by reconciling bank accounts regularly to ensure transactions align with your financial records. Leverage accounting software like QuickBooks or Xero to automate this process and generate real-time reports.
Track both inflows and outflows, and focus on recurring patterns. Identify peak expense periods and align them with your revenue cycle to avoid shortfalls.
Regular cash flow monitoring also helps you identify inefficiencies. For instance, you may notice some customers consistently delaying payments or suppliers charging higher rates than market standards. Address these issues proactively. By embedding cash flow monitoring into your routine, you reduce risk, enhance predictability, and ensure your business remains solvent and agile.
2. Analyze Cash Flow Projections
Create a rolling cash flow forecast, factoring in expected receivables, payables, and variable expenses. A 13-week cash flow analysis can provide critical insights for decision-making. This tool focuses on short-term liquidity, helping you anticipate and address cash flow gaps before they become problems.
To create a 13-week cash flow projection, start by outlining all expected inflows, such as receivables and revenue from sales. List cash outflows as well, including payroll, rent, utilities, loan payments, and variable costs, like inventory purchases or seasonal staffing. Estimate future performance and obligations using historical data and upcoming commitments.
Update the forecast weekly to reflect new information, such as unexpected expenses or changes in customer payment patterns. The rolling nature of this analysis ensures you always have an up-to-date view of your cash position.
This analysis is especially valuable during periods of growth or economic uncertainty, as it helps you identify potential shortfalls and take preemptive action. If you project a cash deficit in week eight, you can arrange for financing or delay non-essential expenses.
3. Shorten the Cash Conversion Cycles
The cash conversion cycle measures the time it takes a business to convert resources into cash, from purchasing inventory to collecting receivables. A shorter cycle means faster cash flow, enabling you to reinvest capital sooner. The cash conversion cycle is calculated by the following formula: Days Inventory Outstanding (DIO) + Days Sales Outstanding (DSO) – Days Payable Outstanding.
CCC = DIO + DSO – DPO
Essentially, you want to focus on inventory turnover, production efficiency, receivables collection, and when your bills come due.
Days Sales Outstanding
When optimizing DSO (that is, your accounts receivable), the goal is for your customers to pay you quickly as possible. To encourage this, enforce precise payment terms and promptly follow up on overdue invoices. Offering early payment discounts or using electronic invoicing systems can also incentivize customers to pay faster. Prioritize collections from high-value accounts, but keep tabs on all receivables.
Days Payables Outstanding
To maximize cash on hand, you would collect your receivables quickly and pay your vendors slowly. But this isn’t always possible or even ethical. Just as you don’t want your customers taking advantage of you and your payment terms, you don’t want to take advantage of your vendors either. Maintaining healthy relationships with suppliers is necessary for the long-term success of your business.
Days Inventory Outstanding
DIO is not a concern for service-based businesses – no inventory, no days outstanding. Optimizing DIO is similar to DSO. You don’t want idle receivables any more than you want idle inventory weighing down your balance sheet. You can improve inventory management by using tools to forecast demand accurately and by adopting a just-in-time (JIT) approach. This minimizes holding costs and ensures you only stock what you need. If your inventory employs in house production, streamline processes by automating tasks and improving supply chain coordination, reducing lead times.
By addressing inefficiencies across these areas, you can significantly shorten your operating cycle, improve liquidity, and reduce reliance on external financing.
4. Invoice Promptly
Delayed invoices often lead to delayed payments, putting an unnecessary strain on your working capital. Send out invoices immediately after delivering goods or services, automating the process if possible to minimize delays and human error.
Include all necessary details in your invoices—such as payment terms, due dates, remittance information, and payment methods—to avoid disputes that could delay payments further. Specify penalties for late payments to encourage timely settlement. For customers with a history of delayed payments, consider requesting partial upfront payments to reduce risk.
Regularly review your accounts receivable (AR) aging report to identify overdue invoices. Follow up promptly on these accounts to ensure timely payment.
Finally, ensure your invoicing system integrates seamlessly with your accounting software to track payments effectively and flag overdue accounts. Prompt invoicing combined with proactive follow-ups reduces payment delays, allowing you to maintain steady cash flow and avoid unnecessary borrowing.
5. Send and Receive Electronic Payments
Paying your Bills Electronically
Paying bills electronically with ACH transfers, wire transfers, or other digital methods can streamline your cash management. These methods are faster, more reliable, and sometimes more cost-effective than paper checks, which are subject to delays caused by the postal service or administrative errors.
It’s true that ACHs don’t have the same float time as checks, so the money leaves your account faster, but they are far more secure and predictable. You can schedule payments strategically to align with your cash flow, making payments on the due date to maximize the time funds remain in your account. Many banks and accounting platforms allow you to automate these transactions, ensuring timely payments while reducing administrative burdens.
Banking and accounting systems will often automatically store electronic payment records, making reconciliations faster and more accurate.
With check fraud on the rise and the USPS still struggling after the pandemic, it may be time to switch to ACH.
Accept Electronic Payments
Accepting electronic payments can offer some of the same benefits. Rather than collecting checks and making a trip to the bank, scanning them yourself, or paying for a lockbox service, the money can go directly into your bank account. This saves you time and speeds up collections—no more checks getting lost in the mail.
Digital payments can speed up cash inflows and minimize the risk of bounced checks or payment disputes. By fully embracing electronic payments, you can enhance both operational efficiency and cash flow predictability.
6. Offer Early Payment Discounts
Early payment discounts can be a powerful tool for accelerating cash inflows. For example, offering a 2% discount for payments made within 10 days (commonly called “2/10 Net 30”) drives customers to pay faster while only marginally reducing your revenue.
Consider the following example:
| Invoice Value | $100,000.00 |
| Early Payment Terms | 2/10 Net 30 |
| Discount Taken | -$2,000.00 |
| Total Cash Received | $98,000.00 |
| Time Saved | 20 Days |
When implementing discounts, calculate the trade-off carefully. Compare the cost of offering the discount against the benefits of faster cash flow. Often, increased liquidity outweighs the small reduction in revenue, especially if it helps you avoid borrowing or take advantage of growth opportunities.
Communicate discounts clearly on invoices to ensure customers understand the terms. Automate the tracking of eligible payments to avoid errors and disputes. Monitor the program’s effectiveness by analyzing whether it significantly improves your receivables turnover. In the example above, saving 20 days is good, but may not optimize cash flow as much as other options—you still have to float the receivable for 10 days, and depend on the customer to take advantage of the discount.
Early payment discounts work best for customers with consistent cash flow and good payment histories. For customers with irregular cash flow or a history of delayed payments, this approach may be less effective.
7. Production or Service Priority
Similar to quick pay discounts, incentivizing customers to prepay or put down higher deposits for orders can be an effective strategy. By offering production or service priority to customers who pay in advance, you can better align cash inflows and outflows. Customers might be willing to pay upfront or place a larger deposit in order to jump to the front of a production schedule or expedite their service timeline.
This tactic works particularly well in industries where time is a critical factor for customers, such as manufacturing, construction, or specialized services. This strategy also depends on high demand. Limited availability or long lead times can make this option particularly appealing. Your contracts would also need to be flexible, allowing you to adjust timelines or delivery schedules based on customer priority.
While this strategy can be effective, it may not work in every scenario. If there’s low demand and customers aren’t pressed for time, there’s little advantage in paying early or increasing deposits. Additionally, prioritizing prepaying customers may disrupt production schedules or alienate existing customers waiting in the queue.
By carefully analyzing demand trends and customer behavior, you can determine whether offering production or service priority is a viable strategy for your business. When executed well, it can facilitate immediate cash relief and stronger customer relationships.
8. Manage Inventory Efficiently
Inefficient inventory management drains working capital and increases storage costs, tying directly into DIO (days inventory outstanding). Start by analyzing inventory turnover ratios to identify slow-moving or obsolete items. These products tie up capital without contributing to revenue and should be discounted or phased out to free up cash.
You can implement a just-in-time (JIT) inventory system to minimize excess stock. JIT systems ensure you only order what you need based on current demand, reducing the risk of overstocking. Inventory management software can provide real-time data on stock levels, reorder points, and demand forecasts, enabling more precise ordering decisions. Carefully manage the expense of the software, keeping in mind that it rarely costs just the initial setup or monthly fee—there’s also the man hours associated with system management and administration. However, the savings of effective inventory management can offset these costs.
You can categorize inventory using the ABC method. Prioritize high-value items (A) for close monitoring, medium-value items (B) for standard restocking, and low-value items (C) for periodic review. By adopting these strategies, you can optimize inventory levels, lower carrying costs, and ensure that you are allocating capital efficiently.
Lastly, you can collaborate closely with suppliers to negotiate flexible ordering terms. Some suppliers may offer smaller, more frequent shipments to align with your demand cycles, reducing the need for large upfront purchases. This, of course, increases the price per unit. However, if that product doesn’t turnover quickly, ordering 1000 units for $5/pc will ultimately be cheaper than ordering 10,000 units at $0.50/pc, especially when you consider storage costs.
9. Negotiate Supplier Terms
Negotiating favorable payment terms with your suppliers can be a key strategy to improve your business’ cash flow, and focuses on the DPO (Days Payables Outstanding) side of the cash conversion cycle. Depending on your relationship with your supplier, you may be able to secure Net 45 or Net 60 payment terms. This gives your business more time to generate revenue from sales before paying expenses. Suppliers may also offer discounts for early payments, which you can leverage if your cash flow allows.
To negotiate effectively, you must demonstrate your reliability as a buyer. Show a history of timely payments or increased order volume. Suppliers are more likely to accommodate requests from businesses that provide consistent revenue.
Be prepared to offer something in return. For instance, agreeing to higher order quantities or committing to longer-term contracts can incentivize suppliers to offer extended terms or discounts. When negotiating, focus on finding a balance that benefits both parties. Just like you want to speed up your cash flow, so does your supplier.
Finally, document any new agreements clearly to avoid misunderstandings and monitor supplier payment schedules to ensure you meet agreed-upon deadlines. By optimizing supplier terms, you can extend your operating cycle and enhance liquidity without incurring additional costs.
10. Join Buying Cooperatives
Buying cooperatives (or group purchasing organizations) allow businesses to pool their purchasing power to negotiate better prices and terms with suppliers. By joining a cooperative, you gain access to bulk discounts that are typically unavailable to smaller businesses, reducing your cost of goods sold (COGS) and improving margins.
Research cooperatives within your industry or region to find those that align with your needs. Membership may come with additional fees, but could be offset by the cost savings.
Before joining, evaluate the cooperative’s reputation and policies to ensure it delivers consistent value. Factor in shipping costs or delivery times when assessing total savings. By participating in a cooperative, you may be able to reduce expenses and reinvest the savings into other areas of your business.
11. Conduct Customer Credit Checks
Knowing your customers’ creditworthiness is vital to reducing the risk of late or non-payments. Before extending payment terms to new clients, conduct thorough credit checks using tools like Dun & Bradstreet or Equifax Business. These services provide detailed credit reports, helping you assess whether a customer is financially stable and likely to pay on time.
Set clear credit policies based on the results. For customers with strong credit histories, you can be more confident offering standard payment terms like Net 30 or Net 60. For riskier clients, require upfront payments or shorter payment terms. Alternatively, you could consider securing their payments with a letter of credit or other financial guarantees.
Regularly review the creditworthiness of your existing customers. A once-reliable client might face financial difficulties over time, increasing your risk exposure. Monitor warning signs such as changes in payment behavior, public bankruptcy filings, or declining credit scores.
Clear communication is also key. Share your payment policies upfront and establish terms that balance customer flexibility with your need for reliable cash flow. By proactively managing credit risks, you can reduce bad debt and ensure your business operates with minimal disruptions.
12. Consider Leasing Equipment
Leasing equipment, as opposed to purchasing, can preserve liquidity and provide flexibility. Unlike buying, leasing typically requires no large upfront payments, allowing you to allocate capital to other areas of your business. Additionally, leases often include maintenance and repair services, reducing unexpected expenses.
Leasing is particularly beneficial for equipment with high depreciation rates or short lifecycles, such as technology or machinery subject to frequent upgrades. By leasing, you can stay current with the latest technology without incurring the full cost of ownership.
Be sure to evaluate the total cost of leasing versus buying over the equipment’s lifespan. While leasing may cost more in the long term, the cash flow advantages can outweigh these expenses, especially for growing businesses with limited capital. It’s also important to consider the hidden costs and risks of owning equipment. Will the equipment get used to capacity, or will it sit idle 50% of the time? What happens when the useful life runs out and you have to store or dispose of the equipment? All this costs your business.
Lease-to-own agreements may be an alternative for critical assets you plan to keep long-term, as this can combine the benefits of leasing and ownership.
When negotiating a lease, you should pay attention to terms like early termination penalties, maintenance responsibilities, and end-of-lease options. Ensure the agreement aligns with your operational needs and financial goals. Leasing allows businesses to access essential equipment while maintaining financial flexibility and minimizing upfront risks. Essentially, you are paying a premium in order to preserve your cash so that you can use it to grow the business, or hedge against future risks.
13. Liquidate Unused Assets
Unused or underutilized assets or equipment tie up capital that you could reinvest. Conduct an annual inventory of your assets, including equipment, vehicles, and real estate, to identify those that are no longer contributing to operations. Common examples include outdated machinery, surplus inventory, or leased space that isn’t fully utilized.
Once identified, determine the market value of these assets. For larger assets, such as industrial equipment, consult specialists to ensure you’re maximizing value.
Liquidating assets not only provides an immediate cash infusion but also reduces ongoing costs like maintenance, insurance, storage, and taxes. To avoid accumulating unused assets in the future, you could consider implementing purchasing policies. Evaluate the long-term need for any major purchase and consider leasing instead of buying for assets with limited utility. Regularly reassessing asset utilization ensures your resources remain aligned with business priorities.
14. Adjust Pricing Strategies
Pricing adjustments can directly affect profitability and cash flow. Periodically review your pricing to ensure it aligns with market conditions, costs, and customer demand. Many businesses hesitate to raise prices, but incremental increases can significantly improve your business’ margins (and cash flow) without alienating customers, especially when demand for your products or services is high.
Long-term customers may only accept modest price increases due to established trust, while new customers can be onboarded at updated rates. Additionally, you could consider charging higher prices for clients with slow payment histories to offset the cost of extended receivables.
Test different pricing models, such as bundling services or offering tiered pricing. Bundling can increase average transaction sizes, while tiered pricing allows customers to choose options that fit their budgets, which could lead to higher overall revenue.
Communicate price changes clearly and be sure not to violate any contracts or agreements.
15. Audit Expenses Annually
Regularly auditing your expenses is critical to identifying wasteful spending and reallocating resources to high-priority areas. Review your profit and loss (P&L) statement and categorize expenses into essential and non-essential items. Pay close attention to recurring costs such as subscriptions, software licenses, or vendor fees.
Compare your spending against industry benchmarks to identify areas where you may be overspending. Consider the costs and benefits of each line item. If your advertising costs exceed the industry average or aren’t generating proportional returns, consider reallocating that budget.
After identifying unnecessary expenses, take action to eliminate or renegotiate them. Set clear expense policies to prevent future waste and consider implementing approval workflows for high-value purchases.
Conclusion: Proactively Improve Business Cash Flow
Effective capital management is not about reacting to cash flow problems, but proactively addressing inefficiencies to maintain stability and enable growth. By implementing these 15 strategies, you can better position your business for financial resilience. These actions can improve cash flow and allow your business to seize opportunities, weather challenges, and achieve long-term success.
After evaluating or implementing these strategies, a business may have better insight into whether they are equipped to meet their goals, or whether they require external financing to supplement cash flow.
