Blog: Keep the Cash Flow FlowingJanuary 20th, 2015
One of the most important considerations for any entrepreneur’s business is cash management. Without cash, it’s impossible to cover loan payments or pay staff, and it can make for some sleepless nights.
Without cash, your business can’t operate. It is extremely important to review how you manage your cash flow and consider whether there are any improvements that could be made. The key items to review are:
- Managing receivables;
- Inventory management; and
- Covering overhead payments.
On the whole, receivables generally vary from business to business. Certain businesses will demand payment upfront before a product is released, while others will allow the purchaser a period of time between the sale and receipt of payment.
The best policy when it comes to cash flow management for any type of business is to collect your receivables as soon as possible. This may be achieved by providing an enticement, such as an early payment discount to your customers. In some instances a business may also factor their receivables (i.e. sell the receivable to another company at a discount, but receive payment immediately). Ensuring that you have creditworthy customers will also go a long way in ensuring timely receipt of amounts outstanding. This can be achieved by performing reputation and credit checks on new customers to ensure their ability to pay before extending credit.
Deposit payments promptly. It is always a healthy business sign when you have optimum working capital available. The sooner you make deposits, the sooner you can put the money to work for your business. This speeds up your cash flow and makes funds available for daily expenses.
Where your business involves inventory, inventory management is essential to maintain proper cash flow. Less cash tied up in inventory invariably results in better cash flow.
Trying to maintain the right amount of inventory at the right times is a constant battle for business owners. In general, the nature of your business will dictate your inventory requirements. It is important to know your market and products to ensure that your business maintains the optimum levels of inventory at all times. As a business owner, you will want to ensure that you have enough items in inventory to meet demand, but not too many so that your working capital is all tied up in inventory.
Covering Overhead Payments
Even though you are required to pay for your bills on time, try to take advantage of payment terms, delaying payment where possible, but only to an extent where you do not incur late fees or interest charges. If your supplier terms are for 60 days, don’t pay the bill after 30. You can get an extra 30 days use of that money. The exception to this could be made for bills where trade discounts are offered for early payment.
Review and Reduce Expenses
If you are not certain whether an expense is necessary, hold back until you are confident it will have a favorable impact on you the bottom line. A purchase order system could assist with this. For purchases over a certain dollar value, authorization should be obtained before the item is ordered. This will ensure unnecessary items are not purchased. However, be careful not to cut costs that could hurt profits.
Other Quick Ideas to Increase Cash Flow
- Have a referral system – Word-of-mouth marketing is the most powerful and cost-effective way for a business to acquire new clients. People like to do business with those they like and trust; the same is true for businesses. You should have a referral system in place with your existing customers, business partners and even your employees to help and encourage them to refer your business.
- Create additional income – Have you ever thought of renting out unused space?
- Reduce training costs – Rather than sending the whole team, have one person attend a seminar that can then “show and tell” the rest of your staff.
- Lower staff costs – Use college interns or co-op students for research, setting up databases, etc. They work for credit or a lower salary on a short-term basis and can work on specific projects.
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