Are you struggling to meet your business’ obligations even though your business is profitable? When it comes to managing a business, cash is king. A business can be very busy with high sales volumes and healthy profit margins, but if cash is not managed correctly, it can be the beginning of the end for a small business. To run a successful business, you need to pay close attention to managing cash flow.
Here are some practical tips and considerations for managing cash flow:
- A sale is not a sale until you collect so bill as soon as the product or service has been provided and have someone responsible for monitoring the collection of accounts receivable. Increasing collections by a couple of days can have a significant impact on cash flow, so you should have an established process of following up on receivable balances once they have gone past the payment terms;
- Look for sources of new revenue that are complementary to your existing products/services and/or use excess capacity during slower periods (example: landscapers offering snow removal in the winter);
- Increase prices – a 3% increase will likely go unnoticed and would go to the bottom line;
- Foster good relationships with customers to pay bills on time. Consider whether it would be beneficial to offer customers a discount for quick payment;
- Pay bills when they are due and not earlier (unless favorable discounts are offered for quicker payment);
- Negotiate better terms with your main suppliers to extend payment timing;
- If your business has sales associates, establish a commission payment policy that only pays the commission once customer payment has been received;
- Consistently look ahead at cash flow requirements so that you do not get caught off guard. Having a running cash flow projection is a valuable tool to predict future cash flow shortages and enable you to adapt accordingly to prevent cash flow challenges;
- Arrange financing before you need it. Having a line of credit facility and corporate credit cards will enable you to have access to cash if things get tight. It is much easier to get a lender to approve these credit facilities when they are not needed compared to when the business is experiencing tight cash flow;
- Manage inventory so that you do not have more than what is needed to operate the business. Excess inventory ties up cash and can also lead to lost profits from spoilage/obsolescence/financing costs. Try not to overstock unless there are favorable volume order discounts;
- Hire seasonally (if possible).
Small improvements in any of these areas can improve cash flow by thousands of dollars, reduce interest costs, and allow you to focus on growing the business rather than worrying about the bank balance.
If you are a business owner, I challenge you to pick 1 or 2 suggestions and work on improving cash flow over the next few months and see the difference that it makes. Not convinced? Contact your McCay Duff advisor and we can crunch the numbers to show you the impact!
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