Cash flow is the lifeblood of business. Your goal as an entrepreneur should be to find a way to make money – and keep it. This is particularly true for small business owners who do not have external sources of funds that they can dip to when they need it, such as investors or bank loans. If you can’t pay your bills, you will be forced to make painful decisions making it hard to focus on your product offerings and customers.
Here are tips on how to generate and improve cash flow:
Basic Ways of Improving Cash Flow:
- Have a plan for the cash requirements your business needs.
- Make sure that your products or services are appropriately priced.
- Consider raising your prices
- Look at your sources of revenue and its related source, and ensure that your revenue source is delivering sufficient gross margin.
- Have the ability to borrow money wherever you can. Consider taking out short-term loans such as revolving credit lines and equity loan types to cover short-term cash flow problems
- Lease equipment instead of buy. Don’t tie up your cash in assets.
- Take a hard look at your expenses and find opportunities where you can save – e.g. in rent, service fees, utilities, etc.
- If you are using loss leaders (e.g. products that are deeply discounted to bring in new business or to clear out excess inventory), be sure that your cash position can absorb it. It would be counterproductive to engage in this pricing technique if you are low on cash.
- Sell assets, equipment or inventory that you no longer need for your business.
- Consider buying used equipment, not new
- Barter products for goods and services
- Borrow against assets that are worth cash but still useful for you.
- Repair, rather than replace, capital equipment
- Be more prudent in adopting new technology, unless it can really improve sales, bottom line and your cash flow
- Consider accounts receivable factoring arrangement
Managing Receivables:
- Make certain that your billing, collections, and payables systems are operating as efficiently as possible.
- Adopt the business practice of requiring up-front deposits when making sales.
- Offer discounts to entice customers to pay faster
- Bill promptly, aggressively following-up on overdue invoices and quickly collecting on overdue accounts.
- Be more stringent in your credit and terms, requiring more customers to pay cash for their purchases. However, there are trade-offs to tightening credit in the short and in the long run.
- Increase your sales – but keep accounts receivables low. You can deplete your cash reserves if you need to replace inventory yet accounts receivables haven’t been collected yet.
- Penalize late payers with interest penalties
- Contract with a collections agency for old accounts receivables
Managing Payables:
- Get your customers to pay you as soon as possible.
- Pay your vendors later. Take as long as you’re allowed-without incurring late fees or interest charges to pay your company’s bills.
- Obtain the best possible credit conditions from your suppliers.
- Negotiate with some of your vendors to extend your business liberal payment terms.
- Know which vendor you need to pay first.
Managing Your Spare Cash
- Consider investing your excess cash if your cash flow remains stable and predictable
- Deposit your cash balances in interest-earning accounts
Additional Reading on Cash Flow:
Here are additional articles to help you improve your cash flow:
- 7 Cash Flow Secrets Your Accountant Never Told You
- 10 Ways to Manage Your Cash Flow
- 7 Techniques to Improve Cash Flow
- 7 Deadly Cash Flow Mistakes
