How to Improve Business Cash Flow? 7 Proven Ways for Small Businesses
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How to Improve Business Cash Flow? 7 Proven Ways for Small Businesses

Ryan Thompson
Ryan Thompson
April 24, 2024
Last updated on:

April 24, 2024


Read time: 10 mins

Business cash flow is the movement of money into and out of a business during a specific period. It defines the net amount of cash generated or used by the business operations during that time frame. Positive cash flow occurs when the small business gets more cash than it spends, while negative cash flow shows that more cash is being spent than received.

Cash flow is vital for small businesses as it determines their financial health and sustainability. It ensures the business can cover daily expenses, such as payroll and bills, and invest in growth opportunities. It also provides a buffer during economic downturns or seasonal fluctuations. Therefore, improving cash flow helps small businesses to meet their financial obligations promptly and fosters long-term stability and success. 

However, small businesses encounter various challenges when improving their cash flow. These include inconsistent revenue streams, late payments from clients, Limited access to financing options, inadequate financial management practices, and an insufficient understanding of cash flow dynamics. 

This blog aims to offer necessary information on how to improve business cash flow and help small businesses exacerbate the above challenges.

According to a report by, over 32.8% of small business respondents identified "lack of capital" as the primary reason to close their business.

7 Ways How Small Businesses Improve Their Cash Flow

Small businesses need immediate cash to fulfill their short-term and long-term financial obligations and future and unexpected needs. Here is a look at the best ways to improve cash flow:

1. Streamline Accounts Receivable Processes

Inefficient management of invoicing and collections leads to delayed or missed payments from clients for small businesses. This delay in receiving payments prolongs the cash conversion cycle, leading to a shortage of available funds to cover daily expenses and investments in growth initiatives. Moreover, outstanding invoices tie up working capital that could be reinvested into the business. 

In contrast, streamlining accounts receivable processes significantly enhances cash flow for small businesses by expediting the collection of outstanding payments. Small businesses reduce the time it takes to convert sales into cash by implementing efficient invoicing procedures and proactive follow-up strategies. Likewise, establishing clear payment terms and enforcing timely collections practices encourages prompt payment from clients, accelerating cash inflows. When small businesses establish clear payment terms with their clients, including due dates and acceptable payment methods, it sets clear expectations and reduces ambiguity. 

Tips to Streamline Accounts Receivable Process

  • Establish Clear Payment Terms: Clearly define payment terms, including due dates and accepted payment methods, to set expectations and reduce ambiguity for clients.
  • Automate Invoicing: Utilize accounting software or invoicing platforms to automate the invoicing process, ensuring timely and accurate client billing.
  • Implement Payment Reminders: Set up automated reminders for overdue invoices to prompt clients to make payments promptly and reduce payment delays.
  • Offer Incentives for Early Payments: Encourage prompt payment from clients by offering discounts or incentives for early settlements, motivating them to expedite cash inflows.

How can small businesses manage their accounts receivables?

Small businesses can manage accounts receivables by implementing efficient invoicing systems, setting clear payment terms, monitoring payment deadlines closely, sending timely reminders for overdue invoices, and establishing effective collections procedures.

To know more on this, read our blog: ‘AR Tips for Small Business Owners’

2. Negotiate Better Payment Terms with Suppliers

The failure to negotiate better payment terms with suppliers can adversely affect small businesses' cash flow. Small businesses face pressure to make immediate payments without favorable payment terms, leading to cash flow strain. Similarly, short payment deadlines accelerate cash outflows, leaving limited funds available for other critical expenses or investment opportunities. Additionally, stringent payment terms force small businesses to rely on short-term financing options, such as loans or lines of credit, to meet payment obligations. This results in increased interest costs and financial stress.

On the other hand, negotiating better payment terms with suppliers has a huge positive impact on small businesses' cash flow. By securing extended payment terms or discounts, businesses gain greater flexibility in managing their cash flow and financial obligations. Similarly, longer payment periods allow small businesses to defer payments to suppliers. It also effectively stretches out its cash conversion cycle and preserves cash on hand for other critical expenses or investment opportunities. Additionally, negotiated discounts or favorable terms result in cost savings and enhanced cash flow. 

Tips to Negotiate Payment Terms with Suppliers

  • Research Market Norms: Conduct research to understand standard payment terms in the industry and leverage this information during negotiations.
  • Highlight Benefits: Emphasize the benefits of extending payment terms for suppliers, such as ensuring long-term partnership and the potential for increased orders or referrals.
  • Offer Trade-offs: Propose alternative benefits or trade-offs, such as larger order volumes, early payments, or exclusive contracts, to incentivize suppliers to extend payment terms.
  • Showcase Financial Stability: Demonstrate your business's financial stability and reliability to suppliers to instill confidence in their ability to receive payments on extended terms.

What considerations should small businesses take into account before deciding to outsource?

Before planning to outsource, small businesses need to consider factors such as the cost-effectiveness of outsourcing, the reputation and reliability of potential service providers, the specific functions to be outsourced, and the impact on internal operations and resources.

To know more, read our article:‘5 Essential Tips for Small Businesses Planning to Outsource Accounting for the First Time’

3. Reduce Overhead Costs

Elevated overhead costs significantly impact small businesses' cash flow. These expenses, which encompass various fixed and variable costs associated with running a business, quickly deplete available funds and strain cash flow. These costs, including rent, utilities, salaries, and insurance premiums, increase the financial burden on small businesses, leaving less cash available for essential operations or investment activities. As a result, small businesses struggle to maintain adequate cash reserves to cover day-to-day expenses or unexpected financial challenges. 

However, when businesses reduce overhead costs by trimming expenses such as rent, utilities, salaries, and administrative costs, it helps them free up valuable financial resources. This surplus cash is redirected towards essential operational expenses, debt reduction, or investment in growth initiatives. Moreover, lower overhead costs contribute to improved profitability, as revenue generated exceeds the reduced expenses. This increase in profitability further enhances cash flow, providing businesses with greater financial resilience and flexibility. Additionally, reducing overhead costs minimizes the financial strain during lean periods or unexpected downturns and ensures small businesses' sustainability and long-term viability.

Tips to Reduce Overhead Costs

  • Evaluate Expenses: Conduct a thorough review of all expenses to identify areas where costs can be minimized or eliminated without compromising business operations.
  • Implement Lean Practices: Adopt lean principles to streamline operations, minimize waste, and optimize resource utilization, resulting in cost savings and increased efficiency.
  • Renegotiate Lease Agreements: Explore opportunities to renegotiate lease agreements for office space or equipment rentals to secure more favorable terms or downsizing to reduce occupancy costs.
  • Utilize Flexible Work Arrangements: Offer flexible work arrangements, such as telecommuting or flexible scheduling, to reduce office space and utilities costs.

Types Of Cash Flows
Image 1 - Types of Cash Flow

4. Improve Inventory Management

Excess inventory ties up valuable working capital that could otherwise be utilized for other critical business needs, such as paying bills or investing in growth initiatives. This ties up funds, leading to cash flow constraints. Conversely, insufficient inventory results in stockouts and missed sales opportunities, further impacting revenue generation and cash flow. Additionally, holding obsolete or slow-moving inventory incurs storage costs and reduces the overall efficiency of the business.

On the contrary, effective inventory management plays a key role in improving small businesses' cash flow by optimizing the effective balance between supply and demand. Businesses avoid overstocking or understocking situations by closely monitoring inventory levels and accurately forecasting demand. This ties up working capital unnecessarily or leads to lost sales opportunities. Furthermore, efficient inventory management practices, such as just-in-time inventory systems or vendor-managed inventory programs, minimize the need for excess inventory storage and associated costs. This reduction in carrying costs conserves cash and enhances liquidity. This enables small businesses to allocate resources strategically and invest in revenue-generating activities. 

Tips to Improve Inventory Management

  • Optimize Order Quantities: Analyze historical sales data and demand patterns to determine optimal order quantities, ensuring sufficient stock levels to meet customer demand.
  • Use Inventory Tracking Systems: Implement inventory tracking systems or software to monitor stock levels in real-time, enabling accurate inventory management and reducing the risk of stockouts or overordering.
  • Set Reorder Points: Define reorder points for inventory items based on lead times and demand variability to trigger timely replenishment orders, preventing stockouts and excess inventory buildup.
  • Categorize Inventory: Use ABC analysis to classify inventory items based on their importance and turnover rate.

5. Increase Sales and Revenue

Cash flow becomes strained when sales are insufficient to cover operating expenses and other financial necessities. Similarly, reduced revenue leads to difficulties in meeting payroll, paying suppliers, and covering other day-to-day expenses. Furthermore, limited sales can decrease profitability, making it challenging for small businesses to generate positive cash flow and reinvest in growth initiatives. Ultimately, small businesses struggle to maintain sufficient cash reserves without adequate sales and revenues, hindering their ability to sustain operations and weather financial challenges. 

In contrast, increasing sales and revenue is a fundamental strategy for improving small businesses' cash flow. As sales volume rises, so does the influx of cash from customer transactions. The greater the revenue generated, the more cash becomes available to cover operating expenses, repay debts, and reinvest in the business. Higher sales volumes often result in economies of scale, leading to lower unit costs and improved profit margins. This increased profitability further enhances cash flow by offering a constant stream of income that can be utilized to meet financial obligations and pursue growth opportunities. 

Tips to Increase Sales & Revenue

  • Expand Product or Service Offerings: Diversify offerings or introduce complementary products or services to attract new customers and stimulate additional sales opportunities.
  • Enhance Marketing Efforts: Invest in targeted marketing campaigns across various channels to get access to a broader audience and drive sales.
  • Improve Customer Experience: Prioritize customer satisfaction by providing exceptional service, personalized experiences, and prompt responses to inquiries or concerns.
  • Offer Promotions or Discounts: Introduce limited-time promotions, discounts, or loyalty programs to incentivize purchases and encourage customer engagement.
  • Explore New Markets: Research and identify untapped markets or demographics that go well with your products or services, then develop strategies to penetrate these markets.
  • Commonly Used KPIs in Cash Flow Improvement
    Image 2 - Commonly Used KPIs in Cash Flow Improvement

    6. Monitor and Control Cash Flow Regularly

    Without regular monitoring, businesses lack insight into their cash position, making it challenging to anticipate and address potential cash shortages or surpluses. This lack of awareness leads to cash flow gaps, leaving businesses unprepared to cover essential expenses or seize growth opportunities. Failure to control cash flow also results in overspending, excessive borrowing, or misallocation of funds. Moreover, without proper oversight, businesses may overlook inefficient processes or areas of financial leakage that further strain cash flow. 

    However, by regularly closely tracking cash inflows and outflows, businesses can gain valuable insights into their financial position and liquidity. This proactive approach helps them identify potential cash flow gaps or surpluses in advance and take corrective action accordingly. For example, businesses prioritize collections efforts for overdue invoices or negotiate extended payment terms with suppliers to manage cash flow more effectively. Moreover, regular monitoring enables businesses to detect and address inefficiencies in their operations, such as excessive spending or underutilized resources. 

    Tips to Monitor and Control Cash Flow

    • Regular Cash Flow Analysis: Conduct regular assessments of cash inflows and outflows to identify trends, potential gaps, or surpluses to enable proactive cash flow management.
    • Maintain Cash Flow Forecast: Develop accurate cash flow forecasts to anticipate future cash needs and plan and prepare for upcoming expenses or investment opportunities.
    • Implement Cash Flow Budget: Create a detailed cash flow budget outlining projected income and expenses over a specific period to track actual performance against forecasts and adjust accordingly.
    • Establish Cash Reserves: Set aside a portion of cash reserves to serve as a buffer for emergencies or unforeseen expenses, providing financial stability and liquidity during challenging times.

    7. Explore Outsourcing Opportunities 

    Relying solely on an in-house team impacts small businesses' cash flow in several ways. For instance, maintaining an internal workforce entails significant fixed costs, including salaries, benefits, and overhead expenses. These expenses strain cash flow, particularly during lean periods or limited revenue generation. Additionally, hiring and retaining skilled employees may require substantial upfront investments, further draining financial resources. Moreover, an in-house team lacks the flexibility to scale up or down quickly in response to fluctuating demand.

    In such scenarios, outsourcing can be a strategic tool for improving small businesses' cash flow in several ways. It allows businesses to convert fixed costs into variable costs, as they only pay for the needed services. This flexibility in cost structure helps small businesses conserve cash and allocate resources more efficiently, especially during fluctuating demand or revenue uncertainty. Additionally, outsourcing results in cost savings by tapping into specialized expertise or accessing economies of scale that may not be achievable in-house. By reducing overhead expenses and streamlining operations, outsourcing enables small businesses to free up financial resources that can be reinvested into core business activities or used to bolster cash reserves. 

    Tips to Explore Outsourcing Opportunities

    • Identify Non-Core Functions: Diversify offerings or introduce complementary products or services to attract new customers and stimulate additional sales opportunities.
    • Conduct Cost-Benefit Analysis: Evaluate the potential cost savings and benefits of outsourcing compared to in-house management.
    • Research Service Providers: Research and vet outsourcing service providers to find reputable partners with proven track records and expertise in the desired areas.
    • Offer Promotions or Discounts: Introduce limited-time promotions, discounts, or loyalty programs to incentivize purchases and encourage customer engagement.
  • Start with Pilot Projects: Start small by outsourcing specific tasks or projects on a trial basis to assess performance, reliability, and compatibility.
  • Conclusion 

    Improving cash flow will remain essential for small businesses in the future as they navigate an increasingly competitive and dynamic business landscape. With evolving market trends, technological advancements, and economic uncertainties, maintaining adequate cash reserves will be crucial for small businesses to seize growth opportunities, weather financial challenges, and sustain operations. However, businesses will face several challenges in maintaining sufficient cash flow amidst evolving market dynamics. Primarily, technological disruptions may necessitate investments in digital infrastructure and skill development, further straining financial resources. In such a scenario, outsourcing can offer invaluable support. 

    At Invensis, We help businesses improve their cash flows through specialized services tailored to meet their immediate needs. We utilize cutting-edge technologies and expert insights to offer innovative solutions that optimize cash flow management across various operational facets. We implement best practices and the right approaches to accounts receivable and payable and ensure timely invoicing and payment processing, minimizing delays and improving liquidity. Our comprehensive financial analysis and forecasting tools also offer invaluable insights into revenue streams and expenditure patterns. This enables businesses to enable proactive decision-making to optimize cash flow.

    Contact us to enhance productivity, improve cash flow, and position yourself for success in a competitive business landscape with our back office services

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