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20 Ways to Manage & Increase Small-Business Cash Flow


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While sales are the muscles of a business, cash flow is its lifeblood. Cash flowing regularly into a company is necessary to pay salaries, buy materials, and literally keep the lights on and the doors open. Many companies are forced to slow their growth simply because they lack the cash inflows necessary to support the cost outflows.

Speeding up the flow – converting sales into cash as soon as possible – and increasing the spread between inflows and outflows to build a cash cushion are essential to the long-term, sustained growth of every company, large or small.

Strategies to Add Cash Balances & Speed Cash Inflows

Use these strategies to boost your cash balances and increase the rate of cash inflow. Track your progress with a cash flow spreadsheet, like this handy template from Bench.

1. Deposit Cash Balances in Interest-Earning Accounts

Interest-earning checking accounts are available at most banks today, albeit with a minimum balance requirement. Since interest rates on these accounts are often below rates on savings accounts, certificates of deposit (CDs), or money market accounts, keep the bulk of your funds in these higher-paying accounts.

Then, transfer necessary funds from higher-paying accounts to meet the minimum balance requirement in an interest-bearing checking account plus the total of the payments expected to come due that week or month.

Obviously, it’s important to keep cash liquid, so either avoid long-term CDs, invest in penalty-free CDs, or only invest a portion of funds that you will not need access to until the CD matures. Also, ask your customers to make direct payments to the higher-earning account for accounts receivable so that interest begins immediately.

2. Sell or Retire Excess and Obsolete Equipment or Inventory

Idle, obsolete, and non-working equipment takes up space and ties up capital which might be used more productively. Equipment that has been owned for a longer period will usually have a book value equal to its salvage value or less, so a sale might result in a taxable gain.

This gain should be reported on your tax filings. If you have to sell below the book value, however, you will incur a tax loss, which can be used to offset other profits of the company.

Excess inventory can quickly become obsolete and worthless as customer requirements change and new materials are introduced. Consider selling any inventory which is unlikely to be used over the next 12 months unless the costs to retain it are minimal and the proceeds from a sale would be negligible.

3. Require Deposits on Large or Custom Orders

When working with a unique or custom order, require a security deposit equal to a minimum of 50% of the total price. One-of-a-kind products have a limited sales value, usually only to the person or company making the order. Without a deposit, you are subject to the risk of having to take a reduced payment at delivery time.

Having a deposit reduces the likelihood of a financial loss in the worst of circumstances. Be sure that customers understand your policy, and include it in the contract language to avoid future difficulties.

Conversely, avoid the necessity of paying deposits to your vendors for orders. Ask them to consider your credit history and the good relationship between the two companies in lieu of requiring your cash, which could be put to better use elsewhere.

4. Stage Payments on Long Contracts to Your Benefit

Some customers, due to their size or policies, refuse to enter into contracts that require initial deposits. Rather than lose the business, negotiate payment terms and benchmarks that exceed or parallel your costs.

For example, a typical construction contract might allow a 15% payment when engineering is completed, an additional 25% when materials are delivered to the site, and 50% of the contract amount at specific progress benchmarks. The remaining 10% of the contract price is usually held by the buyer until final inspection and acceptance.

5. Recognize “Scope Creep” and Use Change Orders Where Applicable

If your product is sold with any condition attached, or the service you are to provide is defined in a contract between you and the buyer, you must be aware of the exact requirements expected of you as a result.

Any change in those requirements might enable you to seek extra payment for the ancillary work performed. Failure to seek appropriate compensation hurts your company in two ways: You don’t receive the additional proceeds, and your costs increase.

6. Offer Discounts for Quick Payment

Develop a discount program to encourage quick payments, collecting cash owed to you as fast as possible. Normal payment terms allow a 30-day period for remittance after the receipt of an invoice, with a 2% discount if paid within the first 10 days. You can offer more, less, or no discount for payment, depending upon your needs and your customers’ previous pay habits.

Remember, however, that your ability to institute a collections policy will depend upon your relative strength versus that of your customer. A major account might take an offered discount and still pay late.

Offer Discounts Quick Payment5. Penalize Late Payers With Interest Penalties

A penalty for late payers is the “stick” in the “carrot and stick” approach to collections, the “carrot” being the discount for early payment. While collecting the interest may not be possible in all instances, the presence of the policy will emphasize the importance of on-time payments to your customers.

6. Contract With a Collections Agency for Old Accounts Receivable

Pursuing old accounts receivable requires dedication and time, and can quickly reach the point of diminishing returns for your staff. Few small businesses have the resources, training, or experience to effectively pursue delinquent accounts.

Furthermore, customers who exceed 60 days for payment without a justifiable reason seldom warrant a continued relationship, and usually require firm measures to extract payment.

Third-party collection agencies are adept at working with such accounts, and generally are willing to pursue collection at their own expense in return for a set percentage of the collected proceeds. In some cases, the agencies will simply purchase the delinquent debt from the business at a discount and assume all subsequent risks of collection.

While the costs of third-party collection are exorbitant compared to the original account balance, your alternative may be no payment at all.

7. Utilize Subscription Sales

If your product is regularly consumed and repurchased several times a year, institute a subscription program in which customers prepay for the product and delivery. Newspapers, magazines, cable television, landscaping, and pool maintenance are examples of products and services which lend themselves to a subscription model.

In addition to receiving upfront cash to cover future costs, you have the advantages of securing future sales and easier resource scheduling.

8. Institute a Layaway Sales Program

Layaway programs were very popular prior to the widespread use of personal credit cards in the late 1950s. A layaway program allows customers to select a specific product, which is then reserved for a future purchase and delivery when payment has been completed. The seller has the use of the cash prior to incurring the cost of the product.

Special accounting treatment of the cash received is required, so be sure your accountant is aware of the program.

9. Initiate an Accounts Receivable Line of Credit

Despite their best efforts, even the best-managed companies suffer a lag between the expense of producing a product – a cash outflow – and receiving payment after the sale – the cash inflow. This lag is represented by the accounts receivable balance as a current asset on the company books.

Most banks are willing to lend up to 80% of the accounts receivable balance, thereby providing cash to the borrower at the time of the loan, rather than waiting until the account is collected. The loan amount varies up and down as old accounts are collected and new accounts are added to the loan.

While the loan is collateralized with the accounts receivable, the company – and possibly the company’s owners – remain as guarantors of the debt.

10. Establish an Inventory Line of Credit

Inventories of raw materials, products in the process of being manufactured, and finished products awaiting sale are considered current assets and require significant cash expense to acquire and maintain.

Lenders, recognizing the value and the likelihood that the inventoried materials will be converted into sales in the near and intermediate future, will accept inventory as collateral and loan variable percentages of the inventory balance based upon its composition – in most cases, up to 50% of its value.

Like an accounts receivable loan, the balance will vary up and down as inventory levels change and the borrowers will remain as guarantors. Inventory loans are troublesome for the borrowers as a physical inventory must be regularly taken and valued at current market prices, usually monthly, and subsequently reconciled with the company’s and the bank’s book value.

11. Institute a Factoring Arrangement

Factoring typically involves a third-party, non-bank finance company, or “factor,” which advances a negotiated percentage, 75% to 80%, of the individual accounts in the accounts receivable balance. As the accounts are collected by the company, the advance is paid off, plus a fee to the factor. In some cases, the factor may purchase the accounts at a discount and assume the responsibility and risks of collection.

Whether the company or its owners remain guarantors of the accounts is a matter of negotiation between the company and the factor. Factoring arrangements are typically more expensive (but less restrictive) than accounts receivable loans at regulated banks, so an arrangement should be pursued only after a standard accounts receivable loan arrangement has been rejected.

Strategies to Reduce and Delay Cash Outflows

12. Place Payroll on a Bimonthly Cycle

A bimonthly pay program requires 24 pay cycles per year as opposed to 26 pay cycles for a biweekly pay program, thereby reducing the administrative cost of collecting, verifying, and tabulating payroll information.

Additional cost savings are available by utilizing direct deposit into employees’ bank accounts, rather than writing and delivering paychecks. Transfer funds for payroll immediately prior to the payroll period from the company’s regular interest-earning checking account.

Place Payroll Bimonthly Cycle13. Repair, Rather Than Replace, Capital Equipment

Motor vehicles, properly maintained, easily deliver 100,000 miles of use or more. Modern machinery also is durable and provides years of services. For example, John Deere tractors, Caterpillar bulldozers, and road equipment from the 1950s and 1960s are still in use across the country. Office machinery usually becomes obsolete before it wears out.

To minimize or eliminate costly repairs and replacement:

  • Establish a regular maintenance program for equipment.
  • Use reconditioned and replacement parts from third-party suppliers and manufacturers when necessary, rather than original manufactured parts.
  • Contract with a local repair facility to handle complicated repairs or maintenance beyond in-house capability. Trade exclusivity for a discounted price.

14. Reject the Appeal of New Technology

New products, especially electronic gadgets, are continually introduced with cutting edge features. But before succumbing to the advertising excitement, confirm that the new features will provide a meaningful performance improvement in the ways you use the product in your business.

In most cases, you’ll discover that the benefits are not worth the added cost. Use your existing equipment until it cannot be repaired at a justifiable cost or until the job requirements change and require upgraded equipment.

15. Buy Used Equipment

Used equipment in good condition can generally do the necessary work as well as a new piece of machinery. If you need equipment, search the local advertisements and auctions in your area, specifically looking for companies whose assets have been foreclosed and are being sold by the lender.

You may be able to buy quality, used equipment for savings up to 80% off the price of new equipment, without a comparable degradation of capability.

16. Renegotiate Fixed Debts to Lower Payments

In recent years, interest rates have dropped. And as a result of the recession, the federal government has also initiated a number of programs to stimulate bank lending to small business, as well as guarantees from the U.S. Small Business Administration to facilitate loans.

Review your existing credit lines to determine whether you might be eligible for a lower interest rate or an extended term. If available, consider adding a line of credit (LOC) which can be used in the event of emergency. Always be sure to read and understand the conditions attached to a LOC, including its costs, duration, and any conditions to be able to use it.

17. Delay Product Upgrades

Technological upgrades – software and hardware – occur several times per year. Often, the change between one version and the next is minimal or adds features which you will not use. Be prudent when buying or upgrading desktop computers, cell phones, etc.

Consider open-source software, which is generally free or available for a small donation. If the software provides increased security over your data by thwarting hackers who would destroy your business operation for thrills, you should think seriously before deciding not to upgrade. Safety and security always come first.

18. Defer Payments to Vendors

Delay payment to vendors to the last possible date consistent with the terms of the sale. If there is no penalty for late payments, set a pay cycle of 45 to 60 days from the receipt of the invoice. While slowing the outflow of cash is important, it is equally important to maintain a good credit rating and cordial relations with critical vendors.

Be aware that slowed payment might result in contact from the vendor that has been affected. In those cases, be vigilant that all future payments are as promised. If you’re forced to delay payments, contact the vendor as soon as possible with an explanation and a plan to become current on your debt.

19. Barter Products for Goods and Services

Approach those suppliers that are also customers about a “trade” in which each company receives all or a portion of their respective payments in the form of finished products. Since the exchange value is usually set at each company’s respective retail price, a barter agreement effectively provides a “discount” in an amount equal to the net profit margin on your product and allows you to maintain cash that would otherwise be used.

From an income tax perspective, the products you receive from your suppliers must be reported as gross income in the year of receipt, while the goods or services you provide are a “cost of goods” expense.

20. Use Cash, Not Credit, for Greater Discounts

While this strategy may appear contrary to the need to conserve cash, it illustrates the need to remain flexible at all times in every kind of market environment. During hard times, your vendors’ objectives may be to build as much cash reserve as possible, prioritizing cash over profits.

In those cases, they may offer very deep discounts in their prices in return for cash. If the greater discount justifies the use of cash, take it.

Similarly, if you pay with cash for small purchases, negotiate an extra discount from the sellers since you are saving them the credit card processing fee. If they are not willing to give a discount, use credit cards for payment, but pay the charges to the credit card company before interest is debited to the account.

If you use one of the best small-business credit cards, you’ll receive extra rewards – miles or points for airlines, hotels, and meals – that will save cash elsewhere.

Use Cash Not Credit Greater DiscountsFinal Word

The truth of the expression “cash is king” in the business world has never been contested. Apple, the company which created such iconic products as the iPhone and the iPad, is reputed to have $100 billion in cash on hand to take advantage of unexpected bargains or cover expenses when sales are less than expected.

Financial flexibility is important to every company, particularly when the future economic environment is unclear. Employing the recommended cash flow strategies above can build up your bank balances, extend the number of strategic options available to you as a company, and reduce the likelihood that you will be forced to take unpalatable or distressing actions.


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