One of the most common misconceptions among business owners is that increasing sales is the key to business success. Sure your company needs sales in order to survive and thrive, but many businesses with strong sales have gone belly up because they neglected to make sure they had sufficient cash flow.
Remember: Sales are nice, but it takes cash to pay the bills. This is more important than ever in today’s uncertain economy, in which many companies are delaying payments to suppliers in order to protect their own cash flow. Consider these ideas for keeping your cash flowing during good economic times and bad:
Shorten your cash flow cycle. This consists of (1) accelerating receivables and (2) stretching out payables. Start by focusing on past-due receivables. Are you enforcing your credit terms and aggressively pursuing delinquent accounts? Pick up the phone and call customers who are late and ask them about payment. The likelihood of collecting receivables drops drastically as time goes on, from more than 90 percent after 30 days to just 50 percent after six months.
On the payables side take full advantage of the terms offered by your suppliers. Many offer net-30 day terms, which is the same as an interest-free loan to your company. Conversely, some vendors offer discounts for paying early (within 15 days, e.g.). Consider taking the discount if your cash flow will allow it. Steps like these can help shorten your cash flow cycle by 10 to 15 days, which can have a huge impact on your daily cash flow.
Implement just-in-time inventory management practices. Excess inventory sitting in your warehouse represents a huge investment. It’s like cash sitting on your shelves. With JIT inventory management goods are delivered to you as they’re needed, instead of days or weeks in advance. If you’re keeping inventory on a just-in-case basis instead of just in time, you’re probably costing your company cash.
Cut costs and reduce waste. Cutting operating expenses is the most direct way to increase cash flow. Think of it as expense management. How can you best utilize your limited cash to maximize the benefit of every purchase you make for your business?
For example, miscellaneous bank fees can add up fast. See if your bank offers free small business checking (most banks today do) and try to avoid overdrafts and paying out-of-network ATM fees. Also, competition is forcing telephone, Internet and wireless rates down in many markets, and you may be able to save by bundling them together. Scrutinize your shipping costs as well. Two- or three-day delivery may cost half as much as overnight shipping, for instance.
Use cash management services from your bank. A lockbox is one of the best cash management tools for many small businesses. It helps accelerate cash flow and the availability of funds by speeding up the deposit of your receivables.
Instead of mailing checks to you, customers mail them to a special post office box that your bank monitors throughout the day, processing and depositing them immediately. This can shave precious days off your cash flow cycle when you consider the fact that checks may sit on your desk or in your accounting department for days before they’re actually taken to the bank and deposited.
Put big-ticket purchases on hold. Finally if you were planning to buy a big-ticket item in the near future (e.g., manufacturing equipment, vehicles, office furniture, computers, or printers) consider putting it on hold. With credit tight it may be difficult to obtain financing now anyway. Waiting until the credit markets ease up will free up cash flow for more pressing needs.
Don Sadler is a freelance writer specializing in business and finance. Reach him at firstname.lastname@example.org.