7 ways to free up cash flow

Small business owners will know the importance of positive cash flow for paying expenses, settling debts, growing and expanding, as well as ensuring there is always a safety net for times of difficulty.

As the post-pandemic economic climate begins to unfold, now may be the perfect time to re-evaluate your business operations and analyse the amount of money coming in versus money going out to see where you can free-up vital cash flow.

Having worked with countless business owners, I have seen how you can strengthen existing relationships with customers and suppliers by maintaining positive cash flow.

Here are 7 practical ways that SMEs and business owners can free-up cash flow.

1 Send out invoices immediately. Receiving delayed payments on invoices can be a root cause of financial issues within the business, particularly if your business is reliant on sales and customer invoices to maintain cash flow. Be sure to provide the invoice to your customer as soon as possible to prevent delays in payment.

Most invoices allow a period of anywhere between 14 and 90 days before payment is due. To avoid being left in the lurch waiting for money to come in, send out invoices to clients as soon as possible.

2 Encourage customers to pay invoices early. While sending out invoices immediately helps get the ball rolling, some customers will still wait the maximum amount of time before settling the amount owed. This is a tricky situation that can cause significant cash flow issues by blocking much-needed funds from coming in.

To minimise the chances of late payments, consider sending invoice reminders, charging late-payment fees or even offering early payment discounts. Some business owners might also consider invoice factoring, which allows a proportion of the cost to be paid upfront through a third-party factoring company that manages the invoice payment, minus a factor fee. 

3 Negotiate payments with vendors. Maintaining an open relationship with your vendors and suppliers can be just as important to business cash flow as communication with the customer. Many suppliers are likely in the same boat as you and experience late payments, which may allow you to negotiate an early payment discount.

If you can get a discount from your supplier for paying your invoice early, this will offset the losses for the early payment discount you provide your customers to keep cash flowing. 

4 Reduce operating expenses. Cutting back on operating expenses is the best way to boost cash flow, particularly as an SME. Get started by listing out all your business expenses to see what you can do without or where a better rate can be negotiated.

Often businesses will have a bank of subscriptions that are running on auto-renewal―such as premium online news subscriptions and image library accounts―so review these and reconsider whether they are necessary. Office rent is one of the largest business expenses, but perhaps employees can work from home. The pandemic has led many bosses and managers to realise that people can work just as efficiently and productively at home, as they would in the office. Alternatively, try to negotiate a discount with your landlord for the rent paid on the office.

5 Liquidate unsold inventory. If you are an SME requiring inventory to make a profit, leaving unsold inventory to accumulate on your premises will ultimately negate your chances of maintaining positive cash flow. Placing a discount on any unsold stock may seem like a loss, but offloading will free-up cash flow and allow you to focus on your core products.

This approach also applies to unused assets and equipment if items are lying around untouched. Do a quick inventory scope to see if there is anything you can sell to bring funds back into the business.

6 Lease business equipment and assets. If the business needs new equipment or assets, consider the benefits of leasing instead of making a capital purchase. Many leases will allow you to upgrade the equipment throughout the term of the lease and payments are often cheaper in the short-term than buying outright. When it comes to technology such as laptops and smartphones, which can quickly become outdated, a leasing agreement allows you to have the newest version instead of owning a depreciating asset. 

7 Re-evaluate your marketing. While marketing is a great avenue to help bring in new clients, it can often be quite costly, especially if you are outsourcing to a marketing agency. If you are finding you are not getting as much of a return on marketing costs as you would like, try looking at how your customers engage with your business to help guide your business decisions. If you are spending large amounts of money on paid advertising, but your customers are finding you through social media, you might consider redirecting your budget or cutting it back completely.

By Helen Baker, financial advisor, money.com.au