If you run a business, then you already know how important cash flow is to your operations. You need cash flow to keep the lights on, pay your employees, and cover material costs. You have to spend money to make money, right? And the only way you can spend money is if you have a healthy cash flow in your business. Good cash flow has two primary characteristics: it's positive and predictable. If your business sometimes gets slowed down by negative cash flow (more money going out of your business than coming in) or you sometimes get tripped up by unexpected cash flow shortages, then you could be in danger of going out of business. Improve cash flow to keep the doors open and free up cash to reinvest and grow your business.
Improving cash flow might seem simple on the surface — cutting costs and increasing revenue. Yes, most of the time the difference between positive and negative cash flow does come down to these two factors, but there is really much more to it than that. As a business owner, you actually have several options for improving cash flow.
1. Start Forecasting
Stop reacting to your business and start managing it. If you aren't already, start cash flow forecasting. This will help you anticipate and prevent cash flow shortages before they occur.
2. Shrink Your Cash Flow Gap
The time between money going out and coming back in is your cash-flow gap. Delay payables, if possible, and collect receivables as quickly as you can.
3. Use Electronic Payment Systems
Electronic payment will help you shrink your cash-flow gap. When paying bills electronically, you can wait until the day they are due. By accepting electronic payments, you are also likely to get paid more quickly.
4. Ask for a Deposit
Requesting a deposit up-front or billing throughout a lengthy project will also help shrink the cash-flow gap.
5. Take Advantage of Discounts
If you're not totally strapped, take advantage of as many discounts for early payment or cash payment as you can. Seeking out discounts can pay off in the long run for larger and more expensive projects.
6. Stop Wasting Money
Thanks to profit margins, every dollar already in your business is inherently worth more than each dollar you earn in revenue because you have to spend money to earn revenue. So, hold onto as much of it as you can. Use job costing, cost allocation, and unit economics to evaluate and improve every part of your business. From individual employees, entire departments, locations, and marketing campaigns to customers, job types, products, and processes, you can determine where you generate revenue and where you might be bleeding cash.
7. Look at Your Pricing
Chronic cash flow shortages often indicate that a business is not charging enough. Take a close look at your pricing, pricing structures, and whether you are actually asking enough in return for your products or services.
8. Take Out a Line of Credit
A line of credit isn't right for every business, but it can provide a much-needed capital injection to keep seasonal businesses afloat throughout the off-season. Before looking for a loan, you should carefully consider the pros and cons (interest, fees, and another monthly payment), the loan amount you will need to tide over the business, and whether you will realistically have the ability to repay the loan in the future. Do not take a loan out to put a band-aid on your company's finances, when there's a more serious problem lurking in your operation costs or pricing structure.
9. Scrutinize Every New Expense
You don't have to be a miser and cancel the employees' ice cream social or pizza Friday to have positive cash flow. But you should really consider the value of every dollar that leaves your business and what you are receiving in return. The happiness of your employees might be invaluable, but do you really need to upgrade to the latest cellphone or software release every few months? Before shelling out beaucoup bucks on new software, hardware, or equipment, really examine the upgraded features and capabilities and whether they will actually help you increase revenue enough to justify the cost.
10. Sell, Sell, Sell!
Liquidate obsolete inventory and sell off old or unused equipment, instead of spending even more money to store these items inside your precious commercial space. Keep in mind that selling inventory and equipment will only provide a temporary solution to improving cash flow. Once sold, you can't sell it again.
But What Will You Worry About If You're Not Worried About Cash Flow?
With a consistently healthy cash flow, your business will operate more smoothly. As a result, you can worry less about responding to cash flow emergencies and focus more on making data-driven decisions to grow your business. When you are no longer preoccupied reacting to your business's financial state, but occupied strategizing for your future, you will finally be able to cut costs, drive profits, and achieve success in your growing business.
Having the help of a company like AccountingDepartment.com can help get you there. Our outsourced bookkeeping, controller, and advisory services are top-level to help CEOs and business owners hand their accounting over to someone they can trust. To learn more about what AccountingDepartment.com can do for you, reach out today.