There are several keys to running a successful business: maintaining cash flow, developing your brand, knowing and understanding your targeted customer, knowledgeable and dedicated employees and more. For this posting we are going to discuss cash flow.
Maintaining cash flow means having the money you need to cover day to day operations and to pay your loans and credit cards. Cash flow is NOT your profits or losses in your business (you can have a profit in a given period in your business and still have no cash in the bank).
What are some mistakes business owners make in managing cash flow?
- We have only one supplier of key products/supplies: If you only have one major supplier, you may be missing out on discounts and the opportunity to get competitive pricing.
- We don’t have a credit policy (or don’t follow it): Define your credit policy for customers who do not pay up front. What will you do when customers do not pay within the terms you have offered?
- We operate on gut feel without analyzing the numbers: Looking at your financial statements on a regular basis to identify trends. This will help you determine when to change your pricing, reduce unnecessary costs and more before it becomes critical.
To increase cash coming into your business:
- Know your customers and their ability to pay (check credit references)
- Invoice immediately and properly (don't wait until the end of the month to send invoices and make sure each invoice shows very clear payment terms; consider requiring all or part of the payment up front or COD)
- Make payments easy for your customer (offer credit cards and discounts/incentives for early payment)
- Work your past due accounts (call, not e-mail customers who are past due and keep a log of promises; stop providing products or services to customers in a delinquent status)
To decrease cash going out of your business:
- Take advantage of trade discounts from your vendor
- Be proactive in talking to your vendors to set up better payment terms
- Don't buy until you really need what you are purchasing (just in time concept)
- Examine your payroll (are you paying a lot in overtime that could be reduced by hiring a part-time employee; be careful about changing employees to subcontractors unless they meet the IRS definition of a contractor)
- Examine your inventory controls (does your physical inventory equal what you have on your books; are you using the FIFO - first in/first out - method for inventory that has a shelf life; do you monitor employees who have access to inventory)
- Consider leasing (while overall it may be more expensive, it may allow you to purchase necessary assets and still be able to make the payments)
- Examine your customer service strategies (it's cheaper to keep customers than to constantly be looking for new customers)
- Examine your marketing strategies (are you reaching your targeted client or are you reaching clients who really can't afford to pay for your offerings?)
- Barter (use customer furnished products or services in exchange for your products or services)
- Avoid unnecessary improvements (may sound like a no-brainer but it happens all the time!)
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