“Making more money will not solve your problems if cash flow management is your problem.”
A healthy cash flow is the lifeblood of any business but is especially important for fledgling small and medium-sized businesses, which account for 99.7% of all businesses in the U.S.A. It allows small businesses to pay debts, pay employees, avoid stockouts, return money to shareholders, and meet other unexpected expenses.
And yet, cash flow is one of the top small business killers. According to SmallBizGenius, 82% of businesses fail because of cash flow problems. If your retail or small business is currently experiencing financial turmoil and you’re looking for tips to improve your cash flow, you’ve come to the right place. In this article, we will walk you through some tips on how to improve cash flow for small businesses that’ll prevent your business from putting up the shutters.
What Is Cash Flow?
Cash flow refers to the total amount of money coming in and going out of the business. In other words, it shows the amount of money generated and spent by operating, financing, and investing activities during a given period.
Cash flow explained
Suppose that during the Christmas season, when sales are higher for more businesses, a retail owner buys inventory to keep up with consumer demand. Their money flows out of the business to their suppliers by purchasing inventory.
Similarly, when that same retailer sells items or products from their existing inventory, money flows into the business from their customers. And when the retailer pays its employees or utility bills, money leaves the business to its debtors. Cash flows into the business when the retailer collects a monthly payment on a financed item a customer purchased months ago. And the list goes on. In the end, cash flow is the net balance of money coming in and going out of a business at a particular time.
Positive vs. Negative cash flow
When you have positive cash flow, you have more money coming into your business than going out, allowing you to pay bills and cover expenses. A positive level of cash flow is essential for an entity to stay in business. Sometimes, a company turns a profit with a new product in three years. But such cases are rare; most owners have to be patient and wait.
On the other hand, an online home-based business can generate a profit immediately because it requires little money to start. An online business only requires an internet connection and a computer, or sometimes a tablet or smartphone. Therefore, maintaining a positive cash flow is much easier.
In the end, the success of an eCommerce business should not be measured by its profitability in the first year. If you are a new business owner, give yourself 18 to 24 months to get your business off the ground. The first year will consist of testing products, repeating, and reinvesting your sales into your business using clear budget guidelines.
You may like 7 Best Tips For Running A Successful eCommerce Website
Managing cash flow
According to Sheryl Sandberg, COO of Facebook, “Cash flow problems can be good news because it’s often when a business grows that you start to have cash flow problems.”
So, to fund a new business, you need to understand how to manage and protect your cash flow. To start, you may need to invest some money from other budgets to cover your start-up costs.
You can also look into alternative financing options for small businesses on those on a tight budget. SBA loans, or other types of business loans, are among the alternatives you can use to get more funds to run your business. It is common for small business owners to rely on these types of funds until their business begins to grow.
What Is The Difference Between Cash Flow And Profit
Cash flow and profit differ in that profit shows the amount left over after all expenses have been paid, while cash flow reflects the net flow of money in and out of business. Profits can either be allocated to the owners and shareholders of the business, often in the form of dividends or reinvested in the business.
Investors and business owners are often looking for a single measure to assess the health of a business. They want to know what number they should look at to determine whether to make an investment or change their business strategy. Cash flow and earnings, two critical and related financial indicators, are often pitted against each other.
Cash flow or profit: Which is one more important
The answer to this question is not straightforward: profits and cash flow each have their own importance. As an investor, business owner, key employee, or entrepreneur, understanding both measures and their correlation is critical to gauging the financial health of a business. There are companies that are both profitable and have negative cash flow that prevents them from paying expenses, expanding, and growing. Likewise, it is possible for a company with positive cash flow and growing sales to be unable to turn a profit, which is the case for many start-ups and growing companies.
How To Improve Cash Flow: 6 Tips For Your Retail Business
Now that you understand the basics of cash flow, it’s time to learn how to improve it to avoid experiencing a negative cash flow situation. Below, find some actions you can take to generate more cash in your retail business.
1. Getting customers to pay their invoices on time
One of the keys to increase your cash flow is to get your customers to pay their invoices on time. You can’t have any cash flow if you don’t get paid. It’s as simple as that. Although this is easier said than done, there are several practical strategies that increase the likelihood that your invoices will be paid more quickly. Here are some tips you can use when it comes to invoicing:
Do follow-up with invoice reminders
To get your customers to pay their invoices on time, don’t hesitate to send them reminders by email or phone call. You can send reminders a few days before the invoice is due, on the day it is due, and a few days after if the customers still didn’t clear up the payment.
There are several accounting programs and invoicing software that you can use. These programs have built-in invoice reminders that you can send automatically to customers who are late in paying. Automated payment reminders help you increase speed, reduce costs, add convenience, and fulfill greater customer satisfaction. However, you can use traditional mail if your budget does not yet allow you to opt for invoice payment software.
Offer incentives to your customers who pay regularly
Another key trick you can use to get your customers to clear their invoices a little earlier is to offer a discount to customers who pay their invoices by a specific date. For example, if the terms of your invoice are “Net-30,” meaning the invoice must be paid 30 days within it being sent, but you want your customers to pay their invoice within a week of receiving it, you can offer them a small discount to get them to pay a little earlier. Customers who want a good deal will be more likely to pay their bills sooner, which means you’ll get cash flowing faster and keep your business operations running smoothly.
Apply a late payment fine
Another key to successful invoicing is to have a well-defined invoicing policy. You must choose a specific time for invoices to be due (e.g., upon receipt, Net-15, Net-30, etc.) and continue to strictly adhere to it. This policy can even go further and include a specific due date to avoid confusion. You can apply a late payment penalty for customers who do not meet the payment deadline.
It’s important to inform your customers of the penalties they may face for late payment when you send out your first reminders. This measure will help you avoid disputes down the road.
When it comes to late payment penalties, clearly state what the penalty is, when it will be applied and how much it will be. You can often include this information in your invoice’s “Terms and Conditions” section. Before setting up your own policy, always research what a typical late payment penalty policy looks like in your industry.
Consider invoice factoring
The last option you should consider is invoice factoring if the above strategies don’t work or if you need immediate cash. Invoice factoring is the process of selling your unpaid invoices to a company in exchange for quick cash.
The factoring company takes a small percentage of the money you earn, but the trade-off is that you don’t have to wait for your customers to pay. Invoice factoring is crucial because it offers a quick way to finance businesses that meet the requirements.
By contacting a factoring company, you can then sell payments due to you and transfer the risk of late or non-payment to a factoring company. This should be a last resort, however. Invoice factoring takes a percentage of each payment, leaving you with less cash flow in the long run.
2. Opt for more efficient inventory practices.
Many retail businesses have their cash tied up in inventory. This happens when there is excess inventory and stores have trouble selling their products. This is why it is essential to handle your surplus inventory before it gets too late. Here are some steps you can take to quickly liquidate excess inventory.
Sell your surplus inventory online
As the saying goes, every cloud has a silver lining. In other words, good things can come from bad. If you’re a retail business and don’t already sell your products online, having excess inventory is a great reason to create an online store.
Selling online can help you get rid of excess products and have more cash to run your business. In addition, the online store will allow you to target other consumers, explore other markets, and increase your sales. Doing so now is more important than ever, as consumers continue to migrate their shopping habits to online marketplaces. You can also consider establishing a store with platforms like Etsy or to sell on third-party platforms such as eBay and Amazon.
See also: Amazon Business Models Guide: 5 Ways to Sell on the Amazon eCommerce Platform
Offer sales discounts
According to SimplyCodes, 97% of shoppers say they always look for a good deal when shopping. 64% of customers look for coupons before shopping at a store. More than half of online shoppers spend more than two hours a week looking for coupons, deals, and savings. Among millennials and moms, 25% spend more than four hours a week.
With so many consumers already familiar with coupons, discounts, and other promotions, it’s imperative to implement a solid promotional strategy that will allow you to get rid of your surplus quickly. When you walk past a store with a “50% off sale” sign in the window, chances are you’ll see more shoppers in your store.
Offering deep discounts allows you to attract new customers and sell your excess inventory at reasonable prices. Of course, your margins will be lower, but it is better to have unsold items in stock. Selling those products will give you the cash you want to cover your expenses. However, you must be strategic in your approach to sales. Do not simply hold a sale to clear out your excess inventory of one product.
It’s also important to be creative with your promotional messages.
Clearance sales are, in effect, sales of excess inventory. For customers, they are an excellent opportunity to obtain significant discounts on products that they may not have noticed or could not afford before. These sales can be held several times throughout the year.
Depending on your industry, certain products sell better at different times of the year. A ski store, for example, is likely to experience a drop in sales in April, which is all the more reason to hold a seasonal sale. Similarly, demand for services is high as winter approaches. Holding a sale is an effective strategy to avoid generating excess inventory during the slower months.
This type of sale has a psychological effect. It consists of notifying your customers, by email or mail, by signs in your store, or by any other marketing strategy you use that you will hold a one-day-only sale. Customers perceive the urgency and will come ready to spend on discounted products. So, you take advantage of this opportunity to liquidate your surplus products.
Resort to inventory liquidators
After you have exhausted all the means at your disposal to get rid of your excess inventory, there is one more option: liquidation. Services such as Liquidation.com or BoxFox are business-to-business wholesale markets where companies offer surplus goods to other companies. Inventory liquidators are willing to buy all types of inventory, like clothing, cleaning supplies, furniture, etc.
The tips recommended to achieve better cash flow are far from exhaustive. Learn more with another in-depth blog post, 6 Ways For Running Down Old And Excess Inventory in a Retail Store, here.
3. Review your credit card terms and conditions
One of the easiest ways to improve your cash flow is to check your credit card terms with your credit provider or financial institution. Usually, there are fees associated with every credit card transaction, and they can add up quickly.
While these fees are generally minimal, many companies offer you the opportunity to negotiate, and a reduction of even a few cents can save you a lot of money in the future. If your business processes a large number of card transactions, for example, see if you can take advantage of this to get better rates. If you cannot negotiate, shop around for other providers until you find a rate that works for your business. Watch the following video to learn how to lower your processing rates.
Steer clear of payment processors that practice tiered pricing. Payment processors that use a tiered pricing model are notoriously known for their blatant lack of transparency and deceptive marketing tactics. Differential pricing allows the provider to easily overcharge merchants for credit card processing.
When it comes to payment processing, interchange-plus pricing and memberships provide merchants with greater cost transparency. Merchants can see how much is paid to the card issuer and how much goes to the processor. Providers that offer blended pricing can also be favorable to retailers with low ticket prices and low credit card volumes.
4. Audit of common area maintenance (CAM) costs
CAM charges – which include operating costs incurred by the owner such as exterior cleaning, parking lot maintenance, etc. – are fixed costs and are usually charged on a cost per square foot basis.
These fees may include lighting, lobby, bathrooms, elevators, landscaping, and parking. In the event of a business renting or leasing the retail space, these charges are typically paid to the landlord by each tenant.
Either way, it’s vital that you know what CAM charges you are paying, as they should be included in your operating costs. If your lease agreement gives you the right to perform CAM audits, consider doing so.
A CAM audit can help you identify excessive fees based on an analysis of your commercial lease and invoices. These charges can then be reviewed and, in some cases, refunded. Certainly, CAM audits can be time-consuming and painful, but if you find errors and overcharges, you can recover some cash and avoid future charges.
Since the point of sale system plays a vital role in processing and facilitating transactions within a company, choosing the best POS provider is imperative for a positive cash flow. There are POS providers that also provide their own merchant services.
The downside with these types of POS providers is that you don’t have the ability to contact other credit card processors to negotiate the best rates that really suit you. Therefore, it is highly recommended to choose a POS provider that gives you the ability to pick the credit card processors of choice and that can be easily integrated into your point of sale system.
5. Always have a cash reserve
It is always better to play it safe when it comes to cash flow. Having a cash plan reserve is about saving money at the end of each month. This money saved will be used to cover your expenses in case of an urgent need for cash flow. The cash plan reserve allows you to better manage the slow or difficult months, buy new equipment when needed, or even pay your employees.
Maintaining a substantial rainy-day fund for your business is critical for weathering even minor bumps in the road.
6. Invest in the right POS technology
At the end of the day, it’s modern technology and software that can really elevate your business, improve operations, and secure more consistent cash flow. As mentioned above, effective inventory management is a big part of this.
Invest in robust inventory management software that gives you an accurate idea of your stock level, provides you with inventory management notifications, and automatically identifies problems and prioritize items with negative stock or that sold less frequently.
But a POS does much more than that: product reporting help you identify at your business what’s working and what isn’t; employee management assists with scheduling to optimize hours and reduce overtime pay or overstaffed floors; accounting integrations allow you to audit your business and seamlessly complete payroll and taxes.
How to Improve Your Cash Flow with KORONA POS
KORONA POS is a point of sale system provider that offers vast inventory management software and is ideally suited for retail trying to better understand their business and improve their cash flow. KORONA POS requires no contract, works with any processor, and all support is already included with your all-in-one POS solution. You will never pay more than your monthly software subscription.
For companies with a limited budget that need POS hardware, KORONA POS offers lease options that allow them to stay financially secure and have enough cash flow to run their business.
If you want to learn more about KORONA POS, including how the POS solution can impact your cash flow, click on the button below for a free product demo.
See related: Cash Handling Procedures in Retail: The Ultimate Guide To Protecting Your Money
Frequently Asked Questions About How To Improve Cash Flow
How to improve cash flow problems?
You can improve cash flow problems in your business with the following strategies: encourage your customers to pay their invoices on time; improve your inventory management to prevent your products from being tied up in cash; review your credit card terms and conditions; perform a common area maintenance audit; decrease your merchant card service fees; save up some money for a cash reserve and invest in good inventory management software.
How to improve cash flow operations?
You can improve cash flow operations by reducing some of the fixed and variable expenses you can do without. In retail, in particular, you will also have many variable expenses, such as shipping costs, equipment purchases, and inventory. To reduce some of these expenses, try to get the best deal you can as a commercial tenant.
How to improve cash flow in a manufacturing business?
Choosing a supplier that can provide you with products at reduced prices, is one of the best strategies to improve cash flow in a manufacturing business. It is possible to negotiate longer credit terms, lower minimum quantities, or price reductions to give you some leeway. Also, make sure your staff is well trained and working in ideal conditions to avoid high turnover costs.
How to improve cash flow for small businesses?
You can improve the cash flow of a small business by not spending money on expenses that are not necessary to your business, and by being careful about which areas of your business you choose to focus on. You can also increase the price of your products. There is no guarantee that raising prices will not result in lost sales, but it could also result in increased cash flow.