Cash Flow

How to Improve Cash Flow: 9 Tips for Service-Based Small Businesses

Between inflation, staffing shortages, and lingering supply chain issues, businesses are having trouble staying afloat.

In fact, 47% of U.S. hiring leaders agree that their company won’t survive for much longer if inflationary pressures continue to be an issue. Another survey from CBIZ shows that 42% of small and mid-sized businesses (SMBs) are short-staffed by at least 10%.

With these conditions, it becomes even more important to properly manage cash flow and ensure you’ve got a steady stream of funds flowing into your business. Otherwise, you’ll find yourself unable to keep up with your financial obligations, operating expenses, and your clients’ needs.

So if you’re looking for strategies for cash flow management, you’ve come to the right place. Keep reading for tips on how to manage your cash flow like a seasoned business owner.

9 Tips to Improve Cash Flow in Your Small Business

No matter how well you’re doing on paper, without enough money on hand to cover your immediate needs, your business may struggle to make ends meet. That’s where the tips below come in.

Managing and then improving your cash flow allows you to shift your focus from keeping the lights on in your business to improving your offerings, outmaneuvering your competitors, and making even more money.

1. Identify Who’s Responsible for Paying You

The person in charge of managing your payments will differ between companies. If your client is a small business, the business owner themselves may process your payments. If your client is a mid-sized or large company, then it might be their accounting department or financial controller instead.

When you start working with a new company, make sure you have the name, phone number, and email address of the person who will be processing your invoices. You may even want to ask for an email introduction ahead of time so you can reach out for any billing questions in the future.

2. Negotiate Better Payment Terms With Your Clients and Vendors

If you’re just starting out, you might be under the impression that what a prospective client says at the negotiation table goes. In reality, though, negotiation from both parties is all but expected during these discussions.

So don’t feel like you have to hold yourself to a client’s preferred payment terms. Instead, you should negotiate terms that allow you to maintain a steady cash flow for your business.

For instance, some clients prefer to only work on net-30 payment terms—where they have up to 30 days to pay your invoices—or to pay your entire fee upon the completion of the project. But that means you’ll need to wait a month or longer just to get paid for the work you’re doing now.

If you’re concerned these terms will hurt your business’ finances, consider negotiating for net-15 or net-7 payment terms, or for a 50% deposit to start the project. These changes will allow you to keep your business up and running while you take care of your clients’ needs.

And don’t forget that negotiation isn’t just limited to new clients. You can negotiate existing contracts with your vendors too. After you’ve built up relationships with your providers, you can ask whether they can extend payment terms, or perhaps offer discounts for paying early or purchasing items in bulk. If you’re on good terms with them, they may be inclined to agree.

This will then free up some of your budget so you can divert them to areas of your business that need the money the most.

3. Learn How to Create a Proper Invoice

The invoice is another tool that can help you get paid faster—or when created incorrectly, prevent you from getting paid on time. If you’re new to creating invoices, read this blog post to learn all of the things that should be included in each one.

The Market Intelligence team at FreshBooks studied users’ payment terms to find which ones get you paid faster—you might be surprised which ones impact your cash flow the most.

Below are a few ways to optimize your invoices for faster payment:

• Be polite. A simple “please pay your invoice by [date]” or “thank you for your business” can help you get paid faster.
• Don’t use jargon. Be as clear and specific as possible on your invoice. Avoid using jargon that may be unfamiliar to your client in your invoice’s product or service description. If your client doesn’t fully understand what they’re being billed for, they’re less likely to sign off on the invoice.
• Be clear about your payment terms. All invoices should have the due date and your payment terms on it. This makes clear when the invoice should be paid by, and reminds them of any early payment incentives or late payment penalties they should be aware of (more on this later).

4. Send Invoices Right Away

For the sake of efficiency, a lot of small business owners recommend waiting to create invoices until you have several of them (a practice called batching) so you can send them all at one time. But this can hurt your cash flow because it stops the flow of money coming into your business.

The sooner you invoice your clients, the sooner they pay you. This is because, in almost all companies, the payment process doesn’t start until they receive a copy of your invoice for their records. So each time you’re due a payment, immediately create an invoice for it and send it out.

And when you use accounting software like FreshBooks that comes with built-in invoicing features, you’ll find that sending invoices is so easy that batching won’t save you much time anyway.

5. Make It as Easy as Possible for Clients to Pay You

Most clients will have a preference for how they pay their vendors and contractors. Offering as many different payment methods as you can manage allows your clients to choose the method that works best for them, ensuring you get paid faster.

After all, online payment methods like PayPal and credit card processing (versus traditional paper checks or wire transfers) don’t just make it easy for your clients to pay you—you get the money in your bank accounts that much faster too. And if you balk at the processing fees associated with electronic payments, keep in mind that they can be written off as a business expense.

Some invoicing platforms have developed advanced features that make it easier than ever before to get paid. FreshBooks users can set up their system so that clients automatically get charged a retainer fee every month—with no action required from them. All clients need to do is input their payment details once, and the platform takes care of the rest.

These newer payment methods may take a little extra time and effort to set up on your end, but it’s worth it. Not only does it help get your money in the bank faster, it allows you to provide better customer service by making it easier for your clients to work with you.

6. Follow Up on Sent Invoices

In a perfect world, all your invoices would be paid within minutes. Unfortunately, though, that’s not the case. Just like you, your clients have their own lives outside of work, so they may occasionally forget about due dates or misplace your invoices.

As a result, invoices can take anywhere from 1 day to 12 weeks or more to get paid—and that can be too long of a wait for a small business.

If your clients tend to pay late, you’ll need to put a system in place to flag these unpaid invoices, follow up on them, and escalate things if needed. Invoices that are left unpaid can result in negative cash flow for your business, but luckily you only need to make a few minor adjustments to prevent most issues.

Start by sending regular follow-up messages to remind your customers about any upcoming or late payments. Here’s an example of what that might look like:

• 1st reminder: 3 days before the due date
• 2nd reminder: The day the invoice is due
• 3rd reminder: 3 days after the due date, if unpaid
• 4th reminder: 15 days after the due date, if unpaid

Depending on your business model and your clients’ payment habits, you can set aside a block of time each week to contact clients about upcoming and outstanding invoices.

Alternatively, use invoicing software that quickly identifies outstanding invoices and highlights them for you on an easy-to-access dashboard or report. This saves you time and helps identify clients you need to follow up with immediately.

With FreshBooks, you can automate as much (or as little) of your business finances as you want. Features like automatic payment reminders follow up on outstanding invoices for you, so you can focus more of your time on billable hours and less time chasing down money.

7. Add Incentives and Late Payment Penalties to Your Payment Terms

Some clients need even more of a push to pay their invoices on time. If following up on invoices doesn’t do the trick for your chronically tardy clients, consider implementing other measures to encourage prompt payment.

One way to do so is by offering a tiny discount to clients who pay their invoices well ahead of the deadline.

So if, for example, you work on net-30 payment terms, you might offer a 5% discount to those who pay you within a week of receiving your invoice. Since it’s not a huge discount, it won’t cancel out your profits, but it’ll be enough for clients who seek extra savings to move quickly and pay your invoices early.

You can also use late payment penalties as an alternative or a complement to early payment incentives.

Essentially, this means you tack on a flat-fee penalty or a percentage of the total invoice once a client hits the late payment threshold (which could be the day after the due date, after a 15-day grace period, or whatever timeline you choose). In addition to helping you get paid on time, adding this to your payment terms paints you as a professional who’s disciplined enough to set boundaries with clients and stick to them.

Whether you implement early payment incentives, late payment fees, or both, make sure to clearly explain these terms in your client contract, during your kickoff meetings if you have them, and in your invoices so the recipients always have a reminder where they can easily see them.

8. Raise Your Prices

If you haven’t raised your prices in a while, especially in recent years, you may be overdue for one—because inflation, the cost of materials, goods, and workers needed to serve your clients well have increased.

Without raising your prices to account for that, your profits and your cash flow will suffer. You’ll need to make more sales or do more work to keep up with your past business performance—and with similar businesses in your industry that have increased their prices.

Of course, there are certain practices you should follow. For example, you don’t want to raise your prices too high too fast, or you risk losing your entire client roster.

You’ll also want to notify your clients well in advance of the price hike. To sweeten the deal and maintain goodwill, you may even decide to include additional products or services at no extra cost in your arrangement with them.

This blog post outlines the process you’ll want to follow when conducting a price increase, plus a template to notify your clients about the pricing changes happening in your business.

9. Streamline Your Business Operations

Review your business processes regularly to discover new ways to save money and time. The CBIZ survey mentioned in the beginning of this blog post offers some insights on how businesses are doing this right now.

For instance, 39% of SMBs are supplementing their current staff with independent contractors. Another 40% are investing in new technology that helps improve efficiency in their operations.

See if your business can do the same. Find ways to free up your employees’ time and energy by identifying tedious tasks that would be better accomplished by AI and other kinds of software. This allows your team to focus on meaningful work that requires more critical thinking or a human touch.

And if you’re in need of more people but can’t afford to hire any more employees, outsource parts of your business operations to freelancers, consultants, or agencies.

Just make sure to carefully consider the tradeoffs first. After all, it may be more valuable to have in-house marketers that dedicate their time to learning your business and its intricacies than an agency that only allows you a certain number of hours or deliverables each month.

Cash Flow Forecasting: The Secret to Improve How You’re Managing Cash Flow

To increase cash flow, above all, you’ll need to keep a close eye on your business finances: How much money is coming in, how much of it is going out, when all of these transactions take place, and how much of your funds are available to use at any given time.

So, make a point to review your business finances—and your business’ cash flow in particular—at least once a month. Then create a cash flow forecast to project how much money is expected to come in and out of your business in the months ahead.

An accounting tool like FreshBooks makes cash flow forecasting easier, thanks to its powerful yet easy-to-understand financial reports. By reviewing your Accounts Aging reports, Expense Reports, Balance Sheet, Chart of Accounts, and more, you can get a better sense of what your cash flow might look like in the months ahead based on current and historical business data.

With the right tools in your back pocket, it becomes much easier to maintain a positive cash flow, identify potential cash flow problems, and ultimately support the business you’ve worked so hard to create.

This post was updated in April 2023.