Cash is king! That phrase is meant to mean that if the cash doesn’t flow into your business, then your business will die. Efficient cash flow management means you are predicting the cash you’ll need at a point in time, no you don’t have to be physic. You can forecast the trends in cash inflows and outflows to determine any potential surpluses or shortages that could occur. You need to maintain a firm control on inventory, how you extend lines of credit, and prudently manage accounts receivable, if you want a smooth cash flow, or would like to increase it. In this article, we’re going to look at the top ten efforts that’ll support you in the above.
Examine Your Pricing
When was your last price increase? Do you increase them a little every year? Is your pricing aligning with your increase costs? Are you afraid you will lose sales if you increase pricing? For the most part, consumers believe a company needs to implement small, regular price increases to counteract for the businesses rising costs. Are you checking out competitor pricing? You should. If you find your prices are lower than your competitors for similar products/services, then it may be time to hike prices.
In the end, that price hike may not be that big of a deal at all. When I was starting, I was working with a coach and he said to double my prices, which I gasped at as I thought I’d lose all my clients. I didn’t double but close to that. I lost one client, and the others were ‘it’s about time’.
Switch Your Customers to Retainer-Based or Value-Based Pricing
I’ll bet your working with your customers on a project basis, or even hourly. You may want to consider going to a retainer or value-based pricing model. With this model, each customer pays an assured amount of money each month in exchange for certain agreed-to-services that are specified in the scope of that agreement.
How do you get clients to switch to retainer or value-based pricing? You could offer a fee discount, state that prices are going up substantially for project-based or hourly projects, have a value add service that wouldn’t cost much anyhow, or some other incentive. This method may reduce your profit margin a bit, however, your cash flow will be much more foreseeable.
Lease Rather than Buy Equipment
You may want to consider leasing equipment rather than buying it outright or using your line of credit. Buying outright can hurt your cash flow, especially if it’s tight to begin with, and dipping into your line of credit may hurt your ability to cover day-to-day expenses. Yes, the cost of leasing is more expensive than just buying the equipment, however, it does allow you to keep more cash on hand. Leasing can be better than financing in many situations as financing may require a large down payment, that could hurt your immediate cash flow.
Reduce Your Inventory Levels
Having too much inventory on hand is a cash killer. You should be assessing your inventory turnover on a regular basis, and ensuring they’re within your industry’s norms. You need to determine your turnover ratio. You do that by dividing your costs of goods sold by the average value of your inventory. You take your inventory turnover ratio and compare that to your industry’s norm, and if it’s lower then you have weak sales.
Be careful of big discounts to get you to buy more inventory than you need. This kind of purchase just ties up cash, and leaves you at risk of having old or outdated stock. It’s best when you’re in that situation to defer any impending orders, and sell your existing stock. It may be wise to sell your inventory at cost, to improve your cash position.
Revamp Your Billing Practices
The faster you convert your accounts receivable to cash, the better your cash flow, and the more available funds are to grow your business. Accounting software allows you to make billing practices that will help you invoice your customers faster, and more regular until the account is paid in full. The software will also allow you to create a report, Aged Accounts Receivable, which shows your receivables outstanding classified by how old the receivable is. The older the receivable, the longer the customer is taking to pay, and the greater risk they become. Typical aging goes 30, 60, 90, 120+ days, anything not in the 30 day is outstanding and needs to be collected right away. Generally, anything over 120 days is usually not collected.
More and more small businesses are accepting credit cards, and getting away from having receivables entirely. You don’t need receivables unless you’re dealing with larger businesses, and even then many have expense accounts for the buyer to use.
Buy in Bulk to Save
The easiest thing here is to go to somewhere like Costco Wholesale and buy your supplies in bulk; many businesses even buy things to sell in their business at Costco. Of course, this only works if you have the space to store them. The dollar store also works for those office supplies that, in the end, don’t really matter if they’re cheap or not.
Another idea is to create a cooperative with some colleagues to buy items in bulk; you spend less cash on supplies. You can do this with office supplies, such as pens, paper, etc., and hand them out to the other members. This allows to perhaps qualify for a bulk purchasing discount you may not otherwise get.
Make Payments to Vendors on the Due Date
Do your vendors offer extended payment terms? Or a small product discount? It may be better in the end to take the extended payment terms. This way you can delay payments until they are due, and have the cash on hand until the last possible moment.
By pushing your payments out as much as 60 or 90 days, that’s comparable to an interest free loan with your supplier. By getting this delay, you now have lots of time to collect your receivables, and then use that cash to pay your vendors.
Reexamine, and Perhaps Renegotiate Your Long-Term Contracts.
Look at your current periodic business expenses, such as insurance or phone service, and for each get three quotes. How do these quotes compare to your current services? Are they comparable? This is the best way to determine if your current vendors are giving you the best value. You should be checking on those price sensitive services, such as internet, long distance and telephone (cellular) services, etc., and renegotiate when you can.
Have more than one vendor in your pocket
Are you buying all, or most, of your supplies from one company? If so, there’s no real incentive for them to lower their prices to you. The same goes for a long-term contract, there’s no real motivation for them to give you great service. However, if your supplier knows you could give the business to another one, your current supplier may be more receptive to your needs, or wants.
Take Advantage of Early Payment Discounts
Do your vendors give you terms such as, 2% net 15 or 4% net 30? If so, it may well be worth taking this discount. That two percent discount on a 30-day invoice could amount to an equivalent 24% profit on an investment. Check on your invoices to see if there is an early payment discount, and use it to your advantage. If not, request your vendors provide one. Some larger companies just take the 2% off anyway when the remit payment.
Cash flow management is there for you to standardize the flow into and out of your business. There are many ways to realize this goal, such as minimizing inventory levels, renegotiating supplier contracts, and joining or starting a buying cooperative.
Home-based Business? How to Make Your Home Client Friendly
Home-based Business? Some Ideas for Places to Meet Clients Outside Your Home
Should You Pay Yourself Salary or Dividends When You Incorporate Your Business?
Five Common Mistakes That Small Business Owners Should Avoid
Do You Know Why the CRA Uses a Profit Test for Business?
What is Income Splitting and How Can it Reduce Your Tax Bill?
Self Employed? Do You Know What Your Tax Obligations Are?
How Can You Claim Expenses on a Business Loss?