By Jake Eisenberg
Running a business without a proper cash flow system in place is like driving a car with a blindfold on: you know where you want to go, but you don’t have any idea how to get there. Likewise, you want to grow your business, but it won’t be possible if you don’t keep track of the money that goes in and out of your company.
Without an effective cash flow management system in place, your business will likely fail in the next few years. In fact, 60% of small businesses fail because of cash flow issues. Fortunately, there are doable ways to effectively manage cash flow and at the same time, increase profitability.
1. Understand that profit does not equate to cash flow
Many business owners believe that cash flow and profit are the same. You can’t analyze your cash flow just by glancing at your profit and loss statement. There are multiple factors that make up your cash flow, such as inventory, taxes, expenses, accounts payable, and accounts receivable.
For effective cash flow management, you’ll need to individually dissect each of these factors, along with your profits and losses. Profit is simply defined as revenue minus expenses. Therefore, you can’t understand the flow of cash in your business by knowing how much you earned.
2. Liquidate inventory or equipment
Do you have equipment that you don’t use? Or inventory you haven’t sold? Idle equipment and unsold inventory tie up capital which could have been used more productively. The equipment you own for years generally has a book value equivalent or less than its salvage value. This means you may see taxable gain by selling this equipment.
Customer demands and requirements change all the time, especially when new products and materials enter the market. For this reason, the inventory you haven’t sold can easily become outdated. If you think your inventory is going to be obsolete in the next few years, make sure to sell them as soon as possible to maximize profits and free up working capital.
3. Add new products and services to expand your market and increase sales
Another way to increase cash flow is to add new sources of income, such as adding new products and services. Brainstorm new product or service ideas that would be a great addition to what you’re currently offering. Make sure that these ideas complement your brand identity.
Perhaps you need to start selling seasonal drinks in your coffee shop, or you may want to offer new facial services for your dermatology clinic. Whatever you decide, make sure to get creative. Know more about your target market; their likes, dislikes, and more to know which strategy works best for your business.
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4. Be strategic about vendor payments
Vendor payments also play a huge role in business cash flow. Some suppliers offer discounts for early payments. Take advantage of this and see if you can pay earlier than expected to save some cash. If early payment is out of the question, negotiate with your supplier and ask them if you can pay on the day when it’s most favorable for you.
5. Have a cash reserve
Having a cash reserve can help your business survive the gaps in cash flow. Applying for a business line of credit is a great way to build a cash reserve. Once qualified, lenders will give you a predetermined credit limit where you can withdraw funds from when needed.
You can use the funds to pay for business expenses and pay off immediate debt. You have the liberty to use the funds immediately or let it sit in your business bank account for months, making it a great option for building a cash reserve.
6. Keep operations lean
Evaluate your business. Do you really need to purchase new equipment? Is hiring new employees really necessary? Sometimes, business owners get caught up with the excitement of starting a business that the thin line between needs and wants starts to blur. Before making any investment decision, make sure to weigh the pros and cons. This helps you retain cash flow and avoid unnecessary expenses.
7. Encourage your customers to pay invoices on time
Typically, you’d have to wait for 30, 60, or 90 days before your customers are set to pay their invoices. Sadly, some of these clients won’t pay on time and the 30, 60, and 90 days may become 40, 70, and 100. Late paying customers can put a dent in your cash flow.
Another effective way to manage your cash flow and increase profitability is to encourage your customers to pay on time. There are many ways to increase the likelihood of getting paid on time or even earlier, such as implementing a late-payment penalty, regularly reminding customers, or incentivize early payments.
8. Apply for invoice financing
The previously mentioned strategies take time. If you need immediate funding, invoice financing is a great solution to cash flow problems. Invoice financing allows business owners to sell pending invoices to a third-party company at a discount. Lenders will immediately give you up to 80% of the total invoice value. You will receive the remaining 20% (minus a small transaction fee) once your customers pay their dues. Even though you’ll pay for a transaction fee, you’ll free up cash flow that’s tied to your pending invoices.
Maintaining positive cash flow is no easy feat. But by using these tips, you now have an idea on how to effectively manage cash flow and boost your company’s bottom line.
About the Author
Post by: Jake Eisenberg
Jake Eisenberg is the co-founder of SMB Compass, which provides financing solutions from $25,000 to $10,000,000 for small and medium-sized businesses. SMB Compass’s mission is to share its experiences and expertise with small and medium-sized businesses looking for help and advice in securing financing for their businesses.
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