How to improve cash flow in retail: 14 steps SMEs should consider

By: Jul Domingo

Cash flow is what’s pumping life into your business.

It’s the sum of all the money coming in and going out of your company, showing you how much cash your business has (or doesn’t have).

But sometimes, the pump can malfunction due to a blockage.

When this happens to an actual pump, you clear the blockage by adding pressure or reducing resistance. In cash flow, it means finding strategies to increase cash inflow or decrease outgoing cash.

Before we dive into ways to improve cash flow, let’s discuss the issues associated with it first.

What causes cash flow problems?

Cash flow determines whether a business will survive. Without sufficient cash on hand, you’ll have to find other ways to pay your employees, suppliers, materials, loans, rent, and inventory.

SMEs are at risk of cash flow problems because of:

• Long payment terms. Long payment terms can have you reaching for your savings while waiting for the money to arrive. About 36% of small business owners wait between 30 and 90 days to get paid.
• Late or Partial Payments. The situation is similar to having an extended payment term but worse since the cash inflow doesn’t arrive as planned. While you wait for the payment, you still have to pay taxes when they are due, which throws off the balance of cash inflow and outflow further.
• Overspending. To succeed in business, you must spend some to win some. But overdoing it—for example, spending too much on marketing—can push you toward negative cash flow.
• Seasonality. Different products perform well in different months. For example, many businesses are busiest in November and December as the holidays approach, whereas swimwear flies off the shelves during the summer. Off-season, your business may have difficulty generating revenue, leading to a decrease in cash flow.
• Fast growth. Even though growing your business quickly is good for your business in the long run, it can disrupt your cash flow for a while. To meet higher demand, you may need to purchase more materials and hire more employees with your funds until you see a return on these investments.
• Low-profit margins. Low-profit margins can originate from high costs and low pricing. You can have a low-margin business if you do it on a large scale–which is hard to do and takes a long time to accomplish. Many businesses struggle with cash flow issues without a healthy profit margin. Many only break even.
• Inventory (or lack thereof). Investing in too much inventory can stifle your cash flow as it sits on your shelves. In contrast, a lack of inventory may prevent you from meeting customer needs and speeding up cash flow.

Use Inventoro to determine which of your stocks are winners and losers to make smarter investment decisions.

14 ways to improve cash flow in retail

Several methods exist to improve your cash flow, each designed to solve the cash flow problems outlined above. We sorted them into five categories:

• Monitor and manage cash flow
• Streamline payments
• Develop a cost-cutting plan
• Establish funding sources
• Adjust your business strategy

Monitor and manage your cash flow

Improving cash flow begins with making it as easy as possible for you to see and understand. Here’s how cash flow management analysis can help you understand your financial situation, recognize patterns, and adjust accordingly:

1. Forecast your cash flow

A cash flow forecast involves estimating future sales and expenses to know whether you have enough cash to run your business. It gives you a leg up on not getting caught with negative cash flow.

Here’s how to improve cash flow forecast:

• Set a timeframe for your forecast. Your predicted start date shows your predicted cash on hand.
• Sales forecasting. Take into account other factors, such as seasonality and trends, to improve accuracy. Your inventory can reveal the bottlenecks in your cash flow. Usually, this step is long and tedious, so automate it using a tool that uses advanced algorithms, such as Inventoro. You can learn more here.
• Make a list of other possible cash inflows besides forecasted sales. Then determine your cash outflows–examples include running costs, marketing fees, and bank loan payments.
• Calculate the forecast by subtracting the cash outflows from the cash inflows.
• Based on your forecast, evaluate whether you need to adjust your business plan to meet your responsibilities or have enough money to invest in and grow your business.

Pro Tip: Automating cash flow forecasting is highly recommended. Not only does it reduce the possibility of human error, it also saves you time.

2. Automate cash flow monitoring

Online and mobile access to your accounts can give you a better picture of your cash flow and allow you to resolve issues in real-time.

Set up email, push, or text notifications for any changes in your business bank account. You can limit your expenses by setting up alarms to notify you if your account balance drops below or purchases exceed a certain threshold.

When you record and track finances, you can avert financial crises. Keeping an eye on your investments also allows you to discover which strategies have a positive impact. Make sure you use programs with Power Business Intelligence to gather data from numerous systems and provide dashboards for monitoring key business metrics.

Streamline payment procedures

Another way to improve cash flow effectively is to keep track of the comings and goings of your finances. Here’s how staying on top of your inbound and outbound payments can help maximize the amount of money you have on hand:

3. Issue invoices early

Many SMEs in business-to-consumer industries get paid before delivering their goods to their customers. But there are businesses, such as those selling in bulk, that rely on the good ol’ invoice.

If you’re one of them—and your invoicing process isn’t as smooth as possible—it can impact your cash flow. “​​We always take steps to get paid faster. For example, we make use of invoice financing to avoid late payments and bad debts,’’ says Austin Fain, owner of Perfect Steel Solutions which caters to the home improvement industry.

Here’s how to improve cash flow in manufacturing, distribution, and wholesale:

• Always invoice clients on time. By waiting until a certain time, you can delay incoming cash.
• Send out accurate and complete invoices. Besides getting the details right, adding information, such as the due date, late payment information, and payment instructions, will go a long way in getting customers to pay on time.

4. Facilitate fast and easy payments–in stores or online

Today’s customers value convenience above all else. In fact, a study by National Retail Federated indicated that inconveniences caused 97% of shoppers to back out of a purchase. only accepting 3 C’s–cash, check, and credit card–will have your customers scurrying to your competitors (especially if you’re an e-commerce owner.)

Consider adding Paypal, bank transfers, and other digital wallets to your payment roster. Make in-store contactless payment available too–it’s a must to cater to 80% of shoppers who use it.

You can also encourage customers to purchase luxury products or make big purchases, offer a no-interest payment plan or a buy now, pay later option. Millennial and Gen-Z shoppers appreciate how these methods allow them to buy products that would otherwise be out of reach.

Regardless of the type or size of your business, you have the option to enhance payment processing so that your customers can pay you whenever, however, they want.

5. Pay employees and bills on time, but not earlier than needed

The notion of paying your bills as soon as you receive them makes you a responsible person, but this isn’t always the best practice for some business owners. The sooner you pay, the less cash you have at your disposal.

But if you pay your bills closer to when they’re due, you can free up your cash for as long as possible. To avoid missing out on payments (and incurring late fees), lean into automation so you can schedule transactions in advance, including employee salaries.

Setting up future payments helps control and improve cash flow so that you have more time to focus on other business-related activities.

Establish funding sources

Diversifying your funding sources is one of the best ways to build a healthy cash flow right away. Not only that, but it will also help you deal with economic downturns and other causes of business fluctuations. Here are ways to improve cash flow with a little bit of financial help:

6. Build a cash reserve

Cash reserves serve as a backup during financial emergencies. It may have been challenging to set one up when you were just starting. But now that you’ve gained momentum in your business, you should get started.

Build up a cash reserve by saving a certain amount every month. At the very least, aim for three months of expenditures. In the event of unexpectedly closing your business (such as the COVID-19 pandemic), you expect no revenue, so your calculation should reflect that.

7. Use a business credit card

A business credit card provides a credit line for purchases and cash withdrawals. It gives financial security in times of slow sales, unpaid balances, and cash shortages.

Banks usually charge high-interest rates for this cushion. As a result, you should not misuse it. Remember that late payments can harm your credit score and incur fees, so paying on time is key to improving your cash flow with credit cards.

A business credit card can help you build credit, which will help you qualify for other, less expensive forms of financial assistance, such as credit loans.

8. Secure financial loans

Most business owners (56%) use loans to acquire assets, invest in new opportunities, or expand their business. By doing so, they avoid depleting their cash reserves and personal savings.

Taking out a bank loan is a sensible move. But qualifying for one isn’t easy. For instance, you need to be in business for at least a year to get approved. Banks may also request proof of your good reputation and growth potential. This is where most small businesses fall short, with 36% getting their loan requests turned down.

At Inventoro, we believe everyone should be able to get financing because it hinders growth for SMEs. We can predict future sales of our clients with high accuracy based on historical data, providing lenders with a glimpse into the future.

We work with Flowpay.io, an online lender that provides fast and bank-free financing. They can present our clients with a direct offer in just one click. Once our clients accept, they’ll receive the cash within 24 hours. Read more about our ground-breaking partnership with FlowPay here.

At Inventoro, we democratize technology to make the process of securing financing easier for our clients.

Develop a cost-cutting plan

You can increase significant savings that can influence a positive cash flow by lowering your expenses. Here’s how to improve cash flow by focusing on the essentials and making adjustments:

9. Reduce operating expenses

Your operating costs represent the most significant part of your expenses. So if you want to create a positive cash flow, reducing them might be a good start.

What can you reduce without compromising your business? First, pore over your recurring monthly, quarterly, or yearly expenses and find out which ones your business can live without. For instance, you could free up your warehouse or even downsize it by reducing inventory and only stocking up on your best-performing items, or at the very least, stop buying products that don’t sell.

Other ideas to reduce your operational costs include:

• Bringing in on-call workers during busy months (instead of permanent workers)
• Reducing marketing budget during slow months
• Stopping subscriptions or programs that don’t benefit you

10. Lease or buy refurbished equipment instead of buying new

For a business to grow, you’ll need to invest in top-of-the-line equipment and technology. But new tools also mean massive upfront payments and expensive ongoing maintenance costs.

If you want to focus on creating a more positive cash flow, you might want to lease equipment at first. By doing so, you reduce the strain of upfront payments and make your expenses a bit more predictable to manage your cash flow better.

But leasing only helps you turn your cash flow around. Ultimately, it isn’t the best long-term solution because it tends to be more expensive over time. Consider buying reconditioned pieces of machinery. If you source from a reputable supplier, you’ll see how refurbished equipment can be as good as new.

Pro Tip: This approach extends to making a software investment. Some platforms lend themselves better to monthly subscriptions (cloud-based) than one-time business investments (on-premise).

11. Negotiate with your suppliers

You can keep cash within your organization and use it in ways that directly benefit your bottom line by extending your payable schedule.

One of the quickest ways to accomplish this is to sit down with your suppliers and examine the terms to see where you can make changes. For example, you can extend their payment terms to coincide with your cash flow or request lower prices in exchange for a longer partnership.

Another way to do this is to leverage your sales forecast. For instance, Inventory customers can anticipate product performance up to two years in advance, and they use this information to renegotiate their contracts. Suppliers will be more willing to adjust their terms if they know you intend to do business with them in the long run.

Renegotiating with your suppliers is better than looking for new ones. You already know the quality of their materials and the speed with which they deliver. If you sub them with lower-quality suppliers to improve cash flow, you risk damaging your brand.

Adjust your business strategy

Sometimes the kinks are in your business plan. You lose money when you waste time on repetitive tasks or miss out on opportunities. Here’s how to improve cash flow from operations:

12. Improve business efficiency

By identifying long and complex processes, you can find ways to automate them. In previous sections, we discussed how you could automate your cash monitoring processes by setting up notifications or relying on software programs such as Inventoro to deal with sales and inventory forecasting.

Analyze your systems and find loopholes that you can turn around. For example, repurposing leftover materials to create new products. A good example of a company that does this well is the sustainable clothing company Grant Blvd. They use up their deadstock and scrap fabrics to make new items. This not only cuts costs but also helps the environment.

Another company that shows how identifying loopholes can work in your favor is The Critter Depot. According to owner Jeff Neal, this helps them find out that “partnering with other farms nearer to our customers can help us fulfill orders while maintaining lower shipping costs.”

13. Increase your prices

Fear is the number one reason business owners are afraid to raise their prices. One concern is that it will drive customers away. But 53% of shoppers consider quality more important than price (only 37%) when making purchases. Consider this your signal to adjust your pricing to improve cash flow.

You can also drive up efforts with proper marketing strategies and build buzz around higher-priced products. If you’re running an eCommerce store, encourage customers to sign up for a waitlist and pre-order new items. Their upfront payments are guaranteed to give your cash flow a boost.

14. Optimize your inventory

Many people hold onto their product in hopes of selling it, but unproductive inventory impacts your cash flow in multiple ways. It takes up space in your warehouse, lowers your profits, and ties up your cash, further draining your cash flow.

“Inventory has an immediate impact on cash flow due to operational changes. If we tend to use more resources and workforce, it decreases automatically due to our spending, or vice versa,” says Martin Seely, founder of Mattress Next Day.

Identify your slow-moving items and stop investing in them. We’ve listed some tips on how to get rid of your deadstock here. It’s also beneficial to invest in a software platform for inventory forecasting and replenishment, such as Inventoro. In addition to helping you segment your products, we create inventory recommendations that guide you to invest only in products that merit a place in your warehouse.

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Improve your cash flow right away

No matter what stage your business is at, improving your cash flow remains relevant. Get your cash flow under control by following these 14 steps.