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Five Ways to Increase Cash Flow

Virtually all small business owners struggle with issues of working capital and cash flow, especially in rapidly growing companies. Although many companies finance growth by borrowing funds to increase their Free Cash Flow (FCF), this approach does have drawbacks. Long-term financing can negatively affect a company’s value unless the funds finance profitable growth—which is much easier said than actually done. Here are a few ways to increase cash flow for your small business without borrowing money through long-term financing:

(1) Reduce inventory levels

Overstocking inventory can tie up significant amounts of cash. Using an inventory tracking solution (like Wasp’s Inventory Software and Inventory Management Systems) to properly track your inventory helps you know what you have on-hand.  Additionally, vigilant inventory tracking will tell you when to reorder—reducing the need to stock large amounts of inventory for a prolonged period of time.

(2)  Identify slow moving inventory

The definition of slow moving inventory, also known as SMI, varies from company to company. However, regardless of your definition, slow moving inventory restricts FCF and adds significant carrying costs. Although the inventory turnover ratio—the cost of goods sold for a year divided by average inventory over those twelve months—can tell you the average number of times per year inventory has been sold, it won’t clearly indicate the specific items that should be deemed slow moving inventory. Using the inventory turnover ratio to calculate the average of all inventory, provides a benchmark. Calculating individual items using the same formula will show you what falls below average—clearly identifying slow moving inventory.  

(3)  Stretch out your payables

Taking the maximum amount of time allotted to pay suppliers gives you the time needed to collect receivables without spending money on short term credit lines.

(4)  Collect past due invoices

In the same way stretching out your payables helps increase your cash flow, slow-paying customers are effectively using you to fund their own operations. Dedicating efforts to collecting old invoices or negotiating a payment plan will improve your business’ cash flow.

(5)  Check your pricing

Businesses are often hesitant to increase prices because they believe it will drive customers away. However, if your own expenses increase, your business may need to raise costs; not only for better cash flow, but for successful profit margins. Cash flow is an important part of running a successful business. If you’re looking for a better way to handle the inventory impacting your organization’s cash flow, learn more about Wasp’s inventory control systems.

How are you managing your cash flow?  Tell us in the comments & subscribe today to receive our weekly blog posts.