Did you have a hard time paying your business expenses this year? If yes, you were probably facing cash flow problems or wondering the reason why companies have cash flow problems. To avoid this in the future, you’ll need to make some critical changes in the year 2021 to increase cash flow.
For the smooth running of operations, cash needs to be flowing in regularly. Regardless of your sales, if you don’t possess enough cash to pay your employees or suppliers or cover rent, utilities, etc., you may have to seize operations. This is where cash flow management comes into play.
Whether you’re an established business or a startup, you must prioritize cash flow management to stay solvent. No matter how reputable your brand is, you might lose your top suppliers if you fail to pay them on time due to cash flow issues. Similarly, the best talent may switch to your competitors if they aren’t paid on time.
A stable cash flow not only allows your business to pay for itself but also helps you achieve rapid growth. You’ll have more cash available to invest in lucrative opportunities, such as setting up a store in another region. Thus, healthy cash flow is the key to accomplishing your short term and long term business goals.
In this guide, you’ll learn several ways to increase your cash flow in 2021, but before that, let’s determine what cash flow is?
What is Cash flow?
In simple terms, cash flow analytics refers to the money coming in (cash inflow) and going out (cash outflow) of your business during a specific period. The net cash flow for any period is calculated by deducting cash outflows from cash inflows.
If the closing balance for net cash flow at the year-end is greater than the opening balance that was reported at the beginning of the year, the cash flow is said to be positive, which indicates the firm’s liquid assets are increasing. On the other hand, if the closing balance is lower than the opening balance, the business has a negative cash flow, implying that its liquid assets are decreasing.
Cash inflows can originate from sales of goods and services, investment income, loan proceeds, sale of assets, etc., while cash outflows arise from operating expenses, purchase of assets, paying suppliers, debt service, and so on.
To gauge the overall health of the company, it helps to break down cash flow into its components. However, it’s important to understand that just as high profits don’t necessarily mean efficient cash flow, high levels of cash flow do not necessarily represent profits. Cash flow is divided into the following three categories in a Cash Flow Statement:
- Operating Cash flow: This denotes cash flow associated with the daily operations, showing whether that business is generating sufficient cash to manage or expand operations.
- Financing Cash flow: Cash flow arising from issuing cash for shares or dividends or adjusting loans.
- Investing Cash flow: Cash losses or gains arising from investments in the financial market and any cash flow adjustments in investments in assets.
Now that you have a deeper understanding of ‘what is cash flow?’, let’s go ahead and find out some effective ways to increase your cash flow in 2021:
Effective Ways to Increase Your Cashflow
Here are 10 ways to increase your cash flow in 2021:
1. Analyze Your Existing Cash Flow Position and Predict for the Future
Success in today’s data-driven world depends on how efficient you are at acquiring data and, more importantly, making sense of it. The same applies to your firm’s financials. Before making any changes, you must develop a solid understanding of your business’s current cash flow situation.
Simply take your inflows and outflows and use them to develop a cash flow forecast in MS Excel. Next, list down the sources of revenue and expenses. Then, use historical data and your intuition to add any increases or decreases you anticipate for each line item in the upcoming period. Finally, review each budget separately to identify opportunities to reduce expenses or grow revenue.
2. Sell Out Excess or Obsolete Assets
As customers’ requirements change, you may need to obtain new inventory, rendering old inventory worthless and obsolete. Likewise, old equipment that’s lying idle not only takes up space but also locks cash that can be used more productively.
Fixed assets that have been used for a long time typically have a book value lower or equal to their salvage value. Thus, you might generate gains from the sale of such assets.
Unless the proceeds from selling obsolete inventory are expected to be negligible and/or the cost to retain them is minimal, sell out everything that’s not likely to be used in the next 12 months.
3. Shorten Your Cash Cycle
A long cash cycle is among the top reasons for cash flow problems. This refers to the amount of time you take to convert your resources, such as accounts receivables, into cash. For example, if you’re billing customers at an average of 45 days after the sale and usually paying your suppliers 20 days after the purchase of inventory, there’s a 25-day difference between cash out and cash in. You can run into serious cash flow issues as a result.
There are various things you can do to shorten your cash cycle. For example, you can offer early payment discounts to those who pay within the 30-day remittance period after the issuance of the invoice. Those who pay on time every month when the payments are due can also be offered discounted products or services. Depending on customers’ habits and your needs, you can offer more or less discount to encourage on-time payments.
If the customers are consistently defaulting on payments, you may even consider imposing penalties for late payments or fees. This might involve a late payment surcharge for a delay of a certain number of days. To avoid these unnecessary fees, your clients or customers may start prioritizing your bill in the future, resulting in better cash flow. However, make sure you give customers adequate notice ahead of time before charging them a penalty.
4. Require Down Payments for Large Orders
Large or custom-made orders often take more time than usual to produce and deliver. This also means that you’ll have to wait longer for payments. On top of that, custom orders have limited sales value as they can only be sold to the client who placed the order. In the scenario that the client doesn’t accept the items, you may suffer significant financial loss. There’s also the risk of having to receive a reduced payment at the time of the delivery.
To minimize the risks associated with large or custom orders, ask customers to pay a security deposit or down payment of 50% of the total price.
On the other hand, try to convince your suppliers to eliminate the need to pay deposits for orders. If a supplier has been requesting advance payments or deposits, ask them to consider the business relationship, your payment history, and credit history to revisit their decision. The money that is retained this way can be put to productive use.
5. Move Regular Clients to Subscription-Based Offering
If you offer professional services, chances are you may have clients that contact you for the same type of services at regular intervals. Signing them up for a subscription-based package will not only make the order process more efficient but also establish a definite source of income so you can more accurately forecast your revenue. Check out our revenue forecast calculator.
But how does this impact your cash flow? You’ll securely store their payment information, and based on the frequency of orders, you can set up automatic billing to receive quick payments.
6. Leverage Invoice Factoring
If everything from repeated follow-ups to providing incentives and charging penalties fails to prompt quick payments from suppliers, you may want to consider invoice factoring. This refers to selling your unpaid invoices to an invoice financing company. The company will collect the invoices, retain a pre-specified percentage from them, and issue the remaining amount to you.
Although it may not be a long-term financing solution, it can help free up some cash when you’re faced with cash flow issues.
7. Revisit Your Pricing Strategy
If your clients or customers pay you on time, cash flow issues might arise from stagnant or decreasing revenue resulting from incorrect pricing. Perhaps your prices are outdated and you’re undercharging your customers, or your rates are so high that you’re losing business to your competitors. Inefficient pricing could be a result of several factors.
Before altering your pricing strategy, don’t forget to account for all the factors that have changed in the past year, quarter, or month. This might include wages, manpower, suppliers, supplier fees, and equipment. It’s quite possible that your costs have been slowly rising, while the prices you charge have remained constant.
For this, conduct a comprehensive comparison between your existing prices and those of your direct competitors. You might find considerable room to increase prices while staying competitive. When required, don’t hesitate to implement a complete price overhaul. An increase in price can be scary for customers, but they’ll understand if you explain to them why the prices had to be changed.
8. Reduce Capital Expenditure
If you’re a growing business, you might be faced with a very tight cash flow. That’s because growth typically creates a drain on cash. Unless you’re a corporate giant, you don’t have to purchase brand new equipment, vehicles, or other fixed assets. Think of ways to minimize your capital expenditure during the growth phase. Your existing business relationships can be of great help in this case.
For example, it could be as simple as disclosing your needs with the people and clients you know. There’s a decent amount of unused equipment and tools at every other business. Many entrepreneurs manage to secure critical assets for negligible costs simply by looking around. All you need to do is think creatively and put the word out.
9. Modify Your Payroll Cycle
If your company’s payroll is currently placed on a biweekly payment program, switching to a bimonthly cycle can make a huge difference to your cash flow position. This way, not only will you have more cash in hand, but the administrative costs of collection, verification, and tabulation of payroll information will also be reduced, further increasing the cash.
If you currently write and deliver paychecks, you can secure more cost savings by leveraging direct deposit into employees’ bank accounts.
10. Avoid Switching to High-Tech Solutions Unless Required
Here is our last way that you can increase cash flow in 2021. No doubt digitization is shaping every industry, but you need not force technology into your business processes for no reason. Today, high-tech options, such as electronic gadgets and software solutions, are constantly being advertised with cutting-edge features. It’s easy to succumb to their sales pitches and end up paying tons of money for something that adds little value to your business.
Before purchasing a high-tech product or signing up for a software subscription, take the time to scrutinize the product or service and whether the features will foster meaningful performance improvement for your business. In most cases, you’ll realize that the improvements are not worth the additional cost.
Unless your job requirements change and demand equipment upgrades or your existing equipment cannot be repaired at a justifiable cost, avoid switching to new, expensive solutions.
Availability of cash is just as important as business profitability. A stable cash flow position not only helps your business thrive but also facilitates business growth. If you want to improve your cashflow in 2021, use the above-discussed ways to increase your cash flow and to understand the importance of cash flow. But before making any changes, make sure you have a clear understanding of what cash flow is and how it’s calculated.