
Why do so many businesses go under?
Imagine a thriving business with a full client list and growing revenue, yet still on the verge of failing.
Now think about this: 82% of business failures are because of poor cash flow management. You’re generating revenue but can’t meet your immediate financial obligations.
Cash flow issues paint a grim reality for businesses at all stages—and there are a whole host of reasons why. Only 18% consider their cash flow forecasting to be above average, leading to far from ideal cash reserves.
Simply put, companies with large revenues can still run out of cash if they don’t practice good cash flow management.
In this article, you’ll learn practical ways to improve cash flow, from accelerating payments to better planning for higher cash reserves, with real-world success stories. Let’s get started.
1. Accelerate Receiving Payments
Every day your invoices are outstanding is a day your cash flow is suffering. You can’t force customers to pay faster, but you can implement proven strategies to speed up your payment collection.
One way of doing this is to automate payment reminders.
Take the logistics company Ninja Van’s workflow-guided reminder system as an example. By sending over 100,000 automated reminders to customers, they collected accounts receivables 10-15 days faster on average, seeing a 20% improvement in collection time.
Such automation not only improved cash flow but also Ninja Van’s collection process.
Tips to Receive Payments Faster
Don’t start with advanced and complex payment systems, instead get your feet wet with high-probability methods that yield instant results.
The emphasis should be on creating a win-win situation, where customers receive incentives for early payments that result in healthy cash flows for your business.
Make sure to always value maintaining a professional relationship while making the experience easier for customers.
Unsure where to start? Follow these tips:
- Communicate: Communicate payment terms as early as possible in the customer relationship.
- Provide Payment Options: Give different ways to pay, like credit cards, ACH, digital wallets, etc.
- Set-up Automatic Payment Reminders: Try 15, 7, or 3 days before due.
- Offer Early Payment Discounts: Do this strategically, for example, 2/10 net 30 might work well.
- Streamline the Payment Experience: Create a customer portal for self-serve payment management.
- Streamline Backend Finance Operations: To better manage vendor relationships.
- Use Review and Adjust Payment Terms: Try monitoring quarterly based on collection data.
2. Make Operations More Efficient
Many business owners focus on sales and revenue but it’s your operations that make the difference between being cash rich or cash poor.
AGCO, the equipment manufacturer, shows how improving their transport processes can make a big impact on operational costs. They implemented an end-to-end Transport Management System that reduced inventory by 24% and improved delivery performance by 25%.
The result? AGCO saw improvements in cash flow and streamlined its entire supply chain.
John Deere, on the other hand, demonstrates the power of digital tools and supply chain optimization. With their MyFinancial app, they reduced the average time it took to receive payments from customers (DSO) to an industry-leading 43 days, well over the industry-standard 70 days.
This gave John Deere a cash conversion cycle of 35 days better than the industry standard and gave them a lot more opportunities to use the cash flow.
How You Can Start
You don’t have to do everything at once to transform your operations. Focus on implementing small changes that will give you measurable results.
Your goal is to find and eliminate cash traps and streamline daily operations for better short-term and long-term liquidity. Start with the highest ROI changes and build on your successes.
Here are some extra tips:
- Audit Your Current Operations: Do this to find bottlenecks.
- Map Your Cash Conversion Cycle: See where inflows and outflows get stuck.
- Automate Routine Tasks: Invoicing and payment processing are good places to start.
- Use Data Tools: Forecast demand and manage inventory with digital platforms.
- Create KPIs and Standard operating procedures (SOPs): Create success metrics for every department, measure them regularly, and hold them accountable.
- Lease Instead of Buying: Preserve cash by leasing equipment and other resources.
3. Grow Cash Reserves with Better Planning
Building cash reserves is key to business stability. When reserves are healthy, you’re immune to unpredictable expense and revenue fluctuations, and can still invest in future growth.
What’s not to like?
However, the hard part is making this a reality for your business.
E-commerce giant Flipkart learned the hard way.
By aggressively pursuing growth instead of focusing on healthy cash reserves, the company burned through $3.7 billion–the highest rate for any Indian company.
Quite simply, Flipkart failed to balance expansion with financial stability.
How to Avoid Depleting Cash Reserves
You can avoid significant cash burn by creating a financial plan to run your operations more efficiently.
This looks like auditing your operational expenses, time spent on tasks, and processes for areas where you can improve. If done correctly, you’ll see the positive results grow your cash reserves over time.
Your plan should be to accumulate cash reserves systematically without compromising daily operations or growth opportunities.
Think of cash reserves as your business’s safety net—they provide stability in tough times and flexibility for future opportunities.
Use these cash reserve tips for quick insights:
- Calculate Monthly Burn Rate: Set targets for 3-6 months of expenses in reserves.
- Have Separate Accounts: For example, one for operating cash, taxes, growth, etc.
- Have a Savings Plan: Allocate a fixed percentage of revenue to reserves.
- Use 13-week Rolling Cash Flow Forecasts: Helps identify cash shortages early.
- Set up Automatic Transfers: To your reserve account on revenue receipts.
- Review and Adjust Reserve Targets: Do this quarterly for seasonality.
- Create Policies for Reserve Funds: Try having triggers for when to use and to top up.
- Consider Cash Generating Financial Products: Like high-interest savings accounts and credit cards with cash-back rewards.
4. Optimize How You Manage Inventory
Your unsold inventory ties up valuable cash. Add increased storage and handling costs and waste to the mix—you have a perfect storm for negative cash flow.
You can avoid this grim reality by exploring proven inventory management techniques like a Just-in-time (JIT) system. By adopting JIT, you’ll transition into ordering inventory exactly when it’s needed–therefore reducing waste and storage costs that will improve your cash flows.
Famously used by Toyota, McDonalds, and Dell—the results are undeniable.
However, you don’t need to be a large corporate firm to implement JIT.
Any business—from solopreneurs to e-commerce retailers—can better manage their inventory for more cash flow with the right tools and planning.
Tips for Managing Inventory
Don’t aim to perfect how you manage inventory, but improve incrementally. Set attainable goals for balancing your inventory levels with demand while reducing your storage costs.
Here are some practical tips to get started:
- Partner With Suppliers: Connect with those who can deliver fast and on time.
- Use Third-Party Logistics Providers: Emphasize those with real-time tracking.
- Test with High Demand Products: Do this before full implementation.
- Use Inventory Management Systems: Tie them with your accounting systems.
- Set up Alerts: For real-time low inventory counts.
- Automate Purchases: When products reach low thresholds, automate purchases.
- Negotiate Extended Payment Terms: With reliable vendors, negotiate extended terms.
Why Improving Your Cash Flow is Critical
Remember, business cash flow improvements are an ongoing process, not a one-off task. Start with the strategies that suit your business best and implement more cashflow management techniques over time.
Regularly reviewing and adjusting these strategies will ensure continued success in creating positive cash flow.
By doing these three things—payment acceleration, operational excellence, and cash reserve management—you’ll build a stronger and more stable business foundation for years to come.
Just be consistent in your approach and flexible enough to change as your business evolves.
Ready to transform your financial planning and cash flow?
With Datarails’ FinanceOS automation platform, you can integrate all your inventory data, supplier payments, and financial planning into one location while you keep working in Excel. In addition, the cash management solution connects all of your businesses’ bank accounts and gives you one clear picture of your cash flow.
Did you learn a lot about how to improve your business’s cashflow?
Here are three more to read next:
- What is a Cashflow Forecast?
- Cash Burn Rate Formula and Calculation
- Cash Flow vs Profit: How They’re Different and Why it Matters
Frequently Asked Questions
Q1. What are 3 ways cash flows out of a business?
Cash flows out of a business through three categories: expenses, investment activities, and financial obligations. Expenses are cash outflows related to business operations, whereas investment activities are cash spent for growth and improvements. Last but not least, financial obligations are your commitments to lenders and investors.
Q2. How to generate cash flow for business?
Generating cash flow for your business follows a mixed approach of prudent financial planning and spending, growing revenue, and healthy cash management. You can start by auditing your financial position, such as your inflows and outflows, to identify which cash flow strategies can yield positive returns.
Q3. How to fix business cash flow?
Fixing cash flow is all about being aware of your inflows and outflows. Here are 5 quick fixes:
- Start by implementing early payment incentives and automating your collections to get money in the door faster.
- You should also streamline your inventory so you’re not holding onto cash in stock for too long.
- Don’t forget to automate any financial processes to eliminate delays and errors.
- Set and stick to monthly budgets, and aim to have 3-6 months of operating expenses set aside.
- And remember, regular reviews and adjustments are your best friends when it comes to maintaining a healthy cash flow.