It is no exaggeration to say that cash flow is the lifeblood of any business.  In fact, unhealthy cash flow is one of the main reasons for small business failure.  Many small business owners can relate to the stress of not having enough cash to cover current operating expenses and yet knowing that they have a vast amount of receivables due to them from customers.  To help keep your business vital and thriving, it’s useful to consider how to manage this common challenge and boost your small business cash flow.

What is cash flow?

How you think about cash flow for your business is largely a matter of how your company pays out its expenses such as wages, overheads, materials, and so on. According to Investopedia, “cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. At the most fundamental level, a company’s ability to create value for shareholders is determined by its ability to generate positive cash flows, or more specifically, maximize long-term free cash flow”.

Factors affecting cash flow

Just getting started:  The early days of a business are often the toughest days for many reasons, cash flow being the most notable. If your business is bootstrapping its growth and counting on new sales to push out of the launch phase, you have likely felt this difficulty.  Among all the other learnings that happen around the time of the launch of a new business, learning to maintain a healthy cash flow is a top priority.

Rich “on paper”: As we alluded to above, many businesses find themselves in the uncomfortable position of making loads of sales and being owned vast amounts of money, but feeling the pinch of being in a cash-poor position. They may even be highly profitable, but as long as the profit is sitting in accounts receivable and not cash in their account, it can be a struggle for them to operate.

Seasonal work:  Generally, a seasonal business such as landscaping or (depending on climate) roofing, is aware of the seasonality of their work and plan their finances accordingly.  Operating a seasonal business successfully means learning effective cash flow management, a powerful discipline in ensuring the success of the company.

Ways to improve small business cash flow

There are three common ways that a small business owner can access to best protect their cash flow. Let’s have a look at the pros and cons of each:

Payment-on-delivery terms

This refers to the practice of only doing business with customers who pay at the time of the transaction and is common in retail sales. In the world of contracting, such as installations, roofing, flooring, HVAC, home improvement, and related services, it is also a common practice to ask for a deposit prior to beginning the work, with the balance due upon completion.

Pros: This is an ideal way to ensure a healthy cash flow. If you have priced out the work or goods profitably, and the customer pays at the time of sale, your cash flow should balance out with a bit of profit left over.

Cons:Enforcing a payment-on-delivery contract can be a major obstacle to closing bigger sales. Customers who might purchase higher ticket items or engage you for more services may find themselves limited by payment-on-delivery terms, thereby reducing your average deal size.

Factoring partners

Factoring refers to the practice of having an outside financing company effectively purchase your company’s receivables. In exchange for a fee, the factoring company then advances your company some percentage of the receivables upfront with the rest paid to you, less the factoring fees, once the customer has paid in full.

Pros: This solution helps you to protect your cash flow while offering your customers extended payment terms, such as 30 days after the completion of the work. Providing the customer extra time to pay may enable them to buy more from you.

Cons:To remain profitable but still cover the additional expense of the factoring company’s fees, you may need to increase your prices. Given the price sensitivity of many customers, this can make it harder to close deals.

Customer financing options

Working with a financing partner such as Financeit gives your company the ability to offer extended payment terms via a financing contract, similar to one you might be offered when purchasing a vehicle.

Pros: The upsides to this option are numerous: first of all, your cash flow is protected by the fact that the financing partner typically pays you immediately upon completion of the work, with all collections of future payments and management of the consumer’s loan managed by the financing company, not you. The flexible, extended payment terms make it easier for the customer to spend more and get the work and materials they genuinely want, driving up your average sale price.

Cons:We may be a bit biased, but it’s tough to think of a downside here. The small amount of extra work in your sales process to present a payment alongside each price (e.g. “this job is $10,000 or $109 per month”) pays off handsomely with a higher average sale price and healthier cash flow.

It’s beneficial to think of cash flow maintenance as an additional work discipline that you can continue to grow your skill set. Watch for ways to build extra value for your customers; this is a practice that is mutually beneficial. Your customers will feel like they’ve received a fair exchange for what they’ve paid you and, ideally, they will send referral business your way for years to come. Having an excellent reputation and a robust referral base keeps you in demand and allows you to keep your prices where you need them to be to grow a healthy company.

As we’ve discussed above, protecting the health of your small business cash flow is more than a simple matter of ensuring that you price profitability into each job while maintaining a competitive rate. You also need to work to ensure that those profits are getting off your books and into your bank account as quickly as possible.

Improve your cash flow and boost your sales by offering your customers financing.