8 strategies to increase your small business' free cash flow

Cash flow challenges are a harsh reality for many businesses, especially small ones. The inability to manage cash flow effectively can lead to missed opportunities, unpaid bills, and ultimately, business closure. However, by focusing on strategies to increase your free cash flow, you can strengthen your financial foundation and create a more resilient business.

What is free cash flow anyways?

Free cash flow is the cash a company has left over after paying for its operating expenses and capital expenditures. It's essentially the cash that's "free" to be used for other purposes, such as:   

• Paying dividends to shareholders   
• Repurchasing company stock
• Paying down debt   
• Investing in research and development   
• Acquiring other companies   

Free cash flow is an important metric because it shows how much cash a company is generating that can be used to create value for shareholders. A company with strong free cash flow is generally considered to be financially healthy and well-positioned for future growth. 

Is free cash flow same as profit?

No, free cash flow is not the same as profit. While they are both important financial metrics, they represent different aspects of a company's financial performance.  

Profit (or net income) is the amount of money a company earns after deducting all of its expenses, including taxes, from its revenue. It's a measure of the company's overall profitability.  
Free cash flow is the cash a company has left over after paying for its operating expenses and capital expenditures. It's a measure of the company's financial flexibility and ability to generate cash.  

Key differences between free cash flow and profit:

• Profit is an accounting concept that is calculated based on accrual accounting principles. This means that revenue is recognized when it is earned, even if the cash has not yet been collected, and expenses are recognized when they are incurred, even if the cash has not yet been paid.  
• Free cash flow is a cash-based concept that is calculated based on the actual cash inflows and outflows of a company.  

In simple terms, profit reflects how much money a company has made on paper, while free cash flow reflects how much actual cash the company has generated.

Now that we have a clearer understanding of free cash flow and its importance, let's explore some actionable strategies to boost it for your small business.

How to increase your free cash flow?

1. Proactive collections

Late customer payments cause serious cash flow problems. You might struggle to pay your own bills on time, miss out on growth opportunities, or worse. Even loyal customers sometimes need a gentle nudge, so consider sending invoices with multiple payment options for convenience.

With Thriday, you see unpaid invoices instantly, avoiding nasty surprises. You can also set up automatic reminders tailored to your customers (friendly nudge or firm deadline? You choose!). Not to mention that Thriday's payment gateway integrations make it super simple for customers to pay you.

2. Invoice immediately

Every day you wait to send an invoice is a day you're not getting paid. This common pitfall can significantly disrupt your cash flow, making it harder to cover essential expenses. A streamlined invoicing process such as Thriday's instant invoicing lets you bill immediately, eliminating this needless delay in getting your money.

Pre-populated templates and automated invoicing save precious time. Bill the moment a job is complete or a product ships, turning your hard work into cash faster.

3. Don't shy away from price increase

As inflation surges, the cost of doing business rises, eroding your profitability and, in turn, your cash flow.  

That "if we raise prices, customers will leave" fear is understandable, but it's riskier to do nothing. Be transparent –  explain to customers why the increase is necessary.

Track your expenses precisely, getting the real-time data needed to make informed pricing adjustments and maintain healthy margins.

4. Inventory efficiency

Too much inventory is money tied up needlessly. Too little inventory means angry customers and missed sales. Finding that sweet spot is key to healthy cash flow, and the wrong tools make it a nightmare.

5. Diversify your suppliers 

Recent global events exposed the vulnerability of relying on a single supplier. Disruptions can cripple your business! Multiple suppliers mean security –  if one falters, you have a backup! Plus, it gives you bargaining power for negotiating better prices.

6. Simplify and strengthen your finances

Managing multiple debts with different interest rates and payment schedules is a major drain on cash flow and adds needless complexity. Consolidating those debts into a single loan with a lower interest rate can dramatically increase your cash availability and simplify your finances.

7. Master your payables

As late-paying customers hurt you, being the late payer damages your cash position. Missed discounts and penalties eat away at your bottom line.

Know exactly what's due and when. Avoid the scramble, preserve supplier goodwill, and always take advantage of those early payment discounts.

8. Know your cash flow statement

Think of your cash flow statement as a financial health checkup. It gives you a snapshot of where your money is coming from, where it's going, and how much is left at the end of the day. But beyond the raw numbers, it reveals crucial insights that can help you make smart business decisions.

Key takeaways when reading your cash flow statement

• Are your core business activities generating enough cash to cover expenses? A positive cash flow from operations is a sign of a healthy business model.
• Are you investing wisely in your company's future? The cash flow from investments section shows how much you're spending on assets like equipment or property, which are crucial for long-term growth.
• How are you funding your business? This section details cash flows related to borrowing money, issuing stock, or paying dividends, giving you a picture of your capital structure.
• The net change in cash flow is the bottom line. It tells you if you're generating more cash than you're spending, crucial for maintaining financial stability.
• By analysing your cash flow statement over time, you can spot seasonal fluctuations or identify areas where you might be overspending.
• Can you handle a rainy day?  Your cash flow statement shows if you have enough cash on hand to deal with unexpected expenses or a slow sales period.
• Are you growing or shrinking?  Changes in your cash flow over time can indicate if your business is expanding or facing challenges.

Remember, your cash flow statement isn't just about the past; it's a tool to plan for the future. Use it to make smarter decisions about your money and keep your business on the path to success!

Thriday's intuitive dashboard and reporting features make it easy to generate and analyse your cash flow statements, giving you the insights you need to make proactive financial decisions and secure your business' future. Take advantage of it today and start building a more resilient and profitable business.

Final thoughts

Sales and profits are important, but they don't always show the full picture of your business' financial health. Free cash flow tells you how much actual money you have left after paying all your bills and investing in your company. This leftover cash is what you can use to grow your business, pay off debts, or even handle unexpected problems.

With free cash flow:

• Grow your business: Invest in new ideas, hire more people, or expand your reach.
• Protect your business: Have a safety net for tough times or unexpected costs.
• Attract investors: Show lenders and investors that your business is doing well and worth supporting.

Want more cash on hand?

Getting paid faster on your invoices can make a big difference. We can show you how through Thriday. Book a call with us today and we'll guide you.

Frequently asked questions

Is it better to have a higher cash flow?

Yes, generally speaking, it's better for a company to have higher free cash flow. A higher free cash flow indicates that the company has more cash available to invest in growth opportunities, pay dividends, reduce debt, or build up its cash reserves. This financial flexibility gives the company a competitive advantage and makes it more resilient to economic downturns.

Is free cash flow better than operating cash flow?

Free cash flow and operating cash flow are both important metrics, but they serve different purposes. Operating cash flow measures the cash generated or used by a company's core operations. It's a good indicator of a company's ability to generate cash from its day-to-day activities. Free cash flow is a more comprehensive measure of a company's financial flexibility. It takes into account both operating cash flow and capital expenditures.  

What is a good free cash flow to sales ratio?

A good free cash flow to sales ratio varies depending on the industry and the company's stage of growth. However, in general, a ratio of 5% or higher is considered to be good. This means that for every $100 in sales, the company is generating at least $5 in free cash flow.  

It's important to note that the free cash flow to sales ratio should be considered in conjunction with other financial metrics, such as profitability, debt levels, and growth prospects.