Tips for Better Cash Flow Management
Cash. Is. King.
This seems obvious, right? I mean, as an individual, WITH cash, you can buy food, pay your mortgage, put gas in your car and put money aside for your next “big” purchase. WITHOUT cash, life comes at you real fast and it’s a grind to survive. So, it appears it is an obvious statement, at least for people on an individual level.
When it comes to small business owners, however, this may not be the case. According to Fundera, “82% of businesses that fail do so because of cash flow problems,” suggesting business owners either don’t understand cash flow’s importance and/or don’t know how to effectively manage it.
Cash flow doesn’t segregate either; its impacts are felt in all industry types and in businesses big and small. Michael Dell, founder and CEO of Dell Technologies, was once quoted on his business during its early years: “We were always focused on our profit and loss statement. But cash flow was not a regularly discussed topic. It was as if we were driving along, watching only the speedometer, when in fact we were running out of gas.”
Never forget, profitable businesses can go out of business too, and just because you show $5,000 in profit doesn’t mean you actually have $5,000 in cash. Likewise, while selling a product or service for $1,000 is nice, the sale doesn’t help your business until you’ve actually collected $1,000 in payments (cash).
With the groundwork for cash flow’s importance laid, let’s look at a few tips to help improve your business's cash flow:
- Stay on top of your Accounts Receivable. Be smart about who you extend credit to and consider doing the following: shortening payment terms, offer early-payment discounts to incentivize faster repayment or require deposits on purchases above a certain dollar amount.
- Regularly audit your overhead expenses to find savings. Ideas include implementing electricity policies like turning off computers each night, monitoring phone and internet usage semi-annually to see if your business fits into a more affordable plan, switching company vehicles to more fuel efficient models, asking yourself if you’re overstaffed, and shopping around for better insurance rates.
- Understanding your gross margin may lead to more cash. Can you increase your product/service prices? Can you negotiate with your suppliers/distributors to reduce your Cost of Goods? Consider readjusting your sales mix to eliminate the products/services with the lowest gross margins.
- Purchase inventory efficiently. Track what products sell and which ones don’t, consider scaling back the purchase of slow-moving products, don’t accumulate too much excess inventory, and track when sales occur for all products and use that info to be strategic when you buy that inventory.
- Make a 12-month cash flow forecast (budget). This helps visualize when cash is coming in and going out. Additionally, you can track when cash is needed most, monitor what expenses you can afford to reduce/eliminate all together and track overdue payments (and their impacts) of Accounts Receivable.
About the blogger: Nick Johnas is Assistant Vice President at Coastal Community Capital. Email him at firstname.lastname@example.org.