How to Improve Cash Flow Management?

A healthy cash flow ensures you can meet your obligations, seize opportunities, and continue growing.

However, 82% of small businesses fail due to inadequate cash flow management, leading to financial distress and missed opportunities.

If you’re looking for ways to understand and monitor cash flow better, read on to learn about our 13 strategies on how to improve cash flow management.

Let’s dive in!

What is Cash Flow Management?

Cash flow management helps you prevent cash shortages, support growth initiatives, and enables timely payment of expenses and liabilities.

It consists of:

Monitoring,
Analyzing, and
Optimizing the inflow and outflow of cash within your business to ensure sufficient liquidity to meet operational needs and financial obligations.

4 Main Reasons for Poor Cash Flow Management

Poor cash flow can severely impact your business's operations and financial health. Although there could be many culprits for poor cash flow, the following 4 are the most common:

📉 Inefficient Accounts Receivable Management

Delays in collecting payments from customers can lead to cash flow issues. If your business has extended payment terms or customers consistently pay late, cash inflows become unpredictable and insufficient to cover immediate expenses.

In addition, ineffective invoicing practices, such as unclear payment terms or lack of follow-up reminders, can also contribute to poor cash flow management.

📉 High Operational Costs

Excessive operational expenses can strain your cash flow.

These range from high costs of goods sold and overhead expenses such as salaries, rent, and utilities to other fixed and variable costs.

If you fail to manage your business expenses effectively or experience unexpected cost increases due to inflation or supply chain disruptions, you may struggle to maintain a positive cash flow.

📉 Overinvestment in Inventory or Assets

Committing too much cash to inventory or capital expenditures can challenge cash flow.

For example, if your business holds excess inventory that isn't selling, cash becomes tied up in those products, reducing available liquidity for everyday operational needs. Similarly, significant investments in fixed assets without corresponding revenue growth can further deplete cash resources.

📉 Lack of Emergency Funds

Without emergency funds, you may be unprepared to handle unexpected financial challenges, such as equipment failures, sudden sales drops, etc.

Furthermore, an absence of emergency funds can make it challenging to meet short-term financial obligations, such as payroll, rent, or vendor payments.

Consequently, it may hamper vendor relationships, employee morale, and your company’s overall reputation.

Finally, it can limit your growth opportunities — If a new project or investment opportunity arises, you might not have the liquid cash available to take advantage of it. This can result in lost potential revenue and market share.

Key Takeaways: 3 Hot Tips To Fix Low Cash Flow

Before we dig deeper, here come 3 practical tips to improve your cash flow.

How to Improve Cash Flow Management in 13 Ways?

Now, let’s check 13 ways you can leverage to improve cash flow management.

1. Understand Your Cash Flow Cycle

Before you can effectively manage your cash flow, it's essential to understand your cash flow cycle — the movement of cash in and out of a business over a specific period.

In order to do so, you need to analyze the following components to get a clearer picture:

Accounts Receivable — How long it takes for customers to pay their invoices.
Accounts Payable — The time you take to pay your suppliers.
Inventory Turnover — How quickly you sell your inventory.

This way, you can identify where you might be experiencing delays or inefficiencies and make informed decisions to improve cash flow.

💰 Puls Project provides a holistic view of all your business processes and transactions, since it allows you to view and manage all companies and accounts in one place.

Thus, you get enhanced financial oversight and a real-time view of your finances.

Furthermore, this capability allows you to easily organize, find, and analyze all the factors contributing to cash flow.

2. Create a Detailed Cash Flow Forecast

A cash flow forecast helps you estimate your incoming and outgoing cash over a specific period, typically monthly.

It allows you to predict your cash positions and prepare for any potential shortfall, keeping you on top of changes in your business environment.

Factors to consider when making a cash flow forecast include projected sales revenue, accounts receivable schedules, inventory requirements, and expected expenses.

💰 A great way to keep all your balances and transactions in check is to centralize and access them from a single place, without needing to switch tabs or platforms.

Puls Project enables unified financial management to track balances and spending across different accounts and companies in a single view.

Doing so will provide better organization and a clear overview of your business performance, helping you create an accurate forecast.

3. Optimize Accounts Receivable

Improving your collection processes will shorten the time it takes to receive payment.

One key step in improving your accounts receivable is establishing clear and consistent invoicing practices.

This includes promptly sending invoices, clearly outlining the payment terms and due dates, and following up with customers on any outstanding balances in a timely manner.

Additionally, it's important to have a well-defined credit policy and carefully evaluate the creditworthiness of your customers before extending credit.

Doing so can minimize the risk of late payments or non-payment, which can significantly impact your cash flow.

Automating your invoicing and payment collection processes can also help streamline your operations and reduce the time it takes to receive payments.

4. Extend Your Payables Period

While paying suppliers on time is crucial to maintaining good relationships, extending your accounts payable period can improve cash flow.

Тhis way, you can keep extra cash when you need it most.

Therefore, you can pay urgent suppliers first while deferring payments to those who offer more flexible terms.

Furthermore, you can contact your suppliers to negotiate longer payment terms without jeopardizing your relationships.

💰 For instance, you can do this with Puls’s Draft Option which allows you to easily see which balances are due today or in the future.

For example, if you need to pay an office lease tomorrow, you can add a future-dated draft payment to see how it will impact your cash flow immediately.

Consequently, you’ll be able to see whether you’d have sufficient funds and call a contractor to ask for a slightly delayed payment.

5. Streamline Inventory Management

Excess inventory can be a significant burden on a business since it ties up cash that you could use for other business operations, such as product development, marketing initiatives, etc.

In order to streamline inventory management, you can:

Implement Just-in-Time (JIT) Inventory to minimize inventory levels by ordering goods only as they are needed.
Analyze Inventory Turnover Ratios to regularly check how quickly you're selling inventory to identify slow-moving items.
Use Inventory Management Software to automate tracking and optimize stock levels to better align with sales patterns.

6. Reduce Operating Expenses

Although operating expenses are inevitable, monitoring them closely can give you valuable insights into where you may be spending more than necessary.

If you identify unnecessary costs, you’ll be able to reduce them and directly improve cash flow.

This is why performing regular audits and assessing your expenses periodically is crucial to identify areas for cuts or efficiencies.

You can also review all software and service subscriptions and cancel any that are not in use or valuable.

In addition, you can also speak with service providers to negotiate better rates for services you rely on.

💰 Did you know that with Puls’s Automated Expense Tracking, you can input your regular monthly expenses once and automatically see them the following month for simplified ongoing financial management?

Furthermore, you can group financial activities across multiple banks and companies and get a better overview of expense tracking, spending optimization, compliance, and insights.

7. Increase Sales Revenue

While it may seem obvious, increasing sales revenue is one of the most effective ways to improve cash flow. For instance, you can:

💡 Introduce new products or services that appeal to your existing customer base, or tap into emerging market trends and diversify your revenue streams

💡 Leverage social media, email marketing, and SEO strategies to reach potential customers and boost sales.

💡 Optimize pricing strategies, including implementing dynamic pricing or offering bundled deals, can also play a crucial role in boosting sales and enhancing cash flow.

💡 Improve customer retention and experience by improving customer service, streamlining the sales process, or investing in technology to foster loyalty and repeat sales.

It goes without saying that increased revenue will provide more cash flow to reinvest in your business and cover your expenses.

8. Establish a Cash Reserve

An emergency fund can serve as a crucial safeguard, protecting your cash flow during unforeseen circumstances, such as slow business periods, unexpected equipment breakdowns, or emergencies.

A well-established emergency fund acts as a financial safety net, ensuring you have the necessary resources to weather challenges.

Moreover, it allows you to seize potential opportunities, such as investing in new equipment, expanding your operations, or pursuing a strategic business venture.

You can build an emergency fund by:

Setting clear goals — Determine how much you want to accumulate in your cash reserve.

Start Small and Build Gradually — If you're just starting to build a cash reserve, begin with a manageable goal.

Set aside a small percentage of your monthly revenue or profits and gradually increase the amount as your financial situation improves.

Prioritize Building the Cash Reserve — Treat contributing to your cash reserve as a non-negotiable expense in your budgeting process.

Prioritize it alongside payroll and overhead costs to ensure you consistently allocate funds.

Create a Separate Savings Account — Open a dedicated high-yield savings account or a separate bank account specifically for your cash reserve.

Keeping these funds separate from your operational accounts will help you avoid accidental spending and keep track of your reserve more easily.

Automate Savings — Set up automatic monthly transfers from your checking account to your cash reserve account.
Reinstate Profits — Whenever your business has a profitable month or quarter, consider reinvesting a portion of those profits into your cash reserve.
Avoid Using the Reserve for Routine Expenses — Treat your cash reserve as an emergency fund and avoid dipping into it for regular expenses or minor contingencies.
Consider Loan Options with terms and interest rates that are favorable and won’t cause sinking into debt.

At Puls Project, we issue loans from our credit fund registered with BaFin. Thus, there is no need for complex forms, and no banks or 3rd parties are involved.

You can set a loan limit and get instant money in your account within 48 hours. We’ll analyze your bank account transactions and identify how much credit you can apply for.

One of the best things is that we sync transaction flows automatically, so your credit availability is also recalculated each time, providing a real-time view.

9. Lease Instead of Buying

Leasing often involves lower upfront costs compared to buying.

Rather than having to come up with a sizeable down payment, you may only need to pay an initial lease fee to get started.

This can make it easier to afford supplies, equipment, etc., in the short term and provide more financial flexibility as you evaluate your long-term options.

Furthermore, leasing agreements typically involve shorter contract periods, such as 2-3 years, which is beneficial if your circumstances or needs change in the near future.

10. Team Up With a Buying Cooperative

If you are a small business, teaming up with a buying cooperative can be a powerful strategy for leveraging your collective purchasing power and accessing wholesale or bulk pricing on goods and services.

By pooling your resources and negotiating as a group, you can enjoy significant cost savings and better terms than what you could obtain on your own.

In addition to cost savings, a well-run buying cooperative can also provide other benefits, such as:

Better access to a broader range of products or services,
Streamlined logistics and distribution, and
Shared knowledge and expertise within the cooperative community.

However, it's essential to ensure that the cooperative's rules and regulations are transparent and just for all members.

11. Play With Your Selling Price

If you are among the businesses that dread raising prices because they fear losing clients, you aren’t the only one.

Most small businesses fear they might lose customers and decrease profits and sales.

Marking up the selling price may lead to a higher profit margin per unit, but it could also decrease overall sales.

Conversely, reducing the selling price may boost sales numbers, but it could potentially affect your profit margins.

However, the key is to find the sweet spot where you can strike the right balance between sales volume and profitability by carefully analyzing:

Market trends,
Competitor pricing and
Customer preferences, to determine the optimal price point.

12. Segment Customers for Credit Checks

Conducting thorough customer credit checks allows you to make informed decisions about extending credit, setting appropriate credit limits, and mitigating the risk of non-payment or late payment.

You should review the customer's credit history, credit score, and other financial information to gain insights into:

The customer's payment history,
Outstanding debt and
Overall financial health.

Since no two delinquent customers are the same, you should segment them based on credit risk to optimize collections.

If you accept delinquent customers, then at least introduce steep interest rates to mitigate risks for your business.

13. Leverage Technology to Manage Cash Flow

Embracing technology can streamline your cash flow management processes and give you better visibility of your cash flow health.

You can use:

Accounting Software to simplify invoicing, expense tracking, and financial reporting.
Cash Flow Management Tools to create cash flow projections, get alerts for overdue invoices, and other insights.
Mobile Payment Solutions to accept payments through mobile platforms to expedite cash inflow.

How to Improve Cash Flow Management with Puls Project?

Puls Project is a FinTech solution that helps you close financial gaps and run your business while simultaneously building credibility and boosting your credit limit.

With Puls, you can:

💰 Centralize and manage all bank accounts in a single place.

💰 Link any bank account from over 4,000 German banks and increase loan limits to close liquidity gaps.