Cash flow is the heartbeat of any business. Without it, your business dies. Managing cash flow is probably one of the most important things an entrepreneur worries about. As a result, learning how to better manage cash flow is a critical skill you will use throughout the life of your business.
So, how do you manage cash flow? It’s usually easier said than done, but using these tips will help.
First things first. The only thing, I mean the ONLY thing, that generates positive cash flow year in and year out is profitability. While you may have peaks and valleys, without consistent profitability your business will die. I always recommend businesses keep their books on an accrual basis of accounting to better understand the profitability. But it is important that profitability is your number one goal.
Assuming you are profitable, or you are hard at work at becoming profitable, there are some areas you can focus on.
If you are a business that sells a product or maintains an inventory of some sort for your operation (for example, a veterinarian which keeps medical supplies and drugs for their patients), inventory can be a huge drain on cash flow. Managing cash flow for a retail store or manufacturing operation can fail or be a success based on how well you manage inventory.
- Inventory tracking software is critical. You need to know how much product you have and how quickly your inventory turns (how often it is sold) to make good business decisions.
- Ordering smaller lot sizes helps reduce cash outlay for product that could sit on your shelf for months. Instead of ordering a 6-month supply of a product, order smaller lots more frequently.
- Negotiate with vendors for consigned inventory (you pay only when you use it)
- Offer obsolete, stale, or slow-moving inventory to your customers at a discount. There’s no sense keeping inventory on your shelves for long periods of time. Turn it into cash instead.
Do you sell to your clients on terms? For example, if you sell a product or service, do you allow them 30, 60 or even 90 days to pay? Here are some tips to help in this area:
- Be diligent in timely collections from your customers. If you give them 45 day terms, stick to that and don’t allow them to pay at 75, or 90 days.
- Negotiate discounts for early payment. If you work with a large customer that can use their clout for 90 day terms, offer them a percentage discount to pay at 30 or 60 days. Perhaps you offer 2% to go from 30 days to 10 days.
- Ask customers for down payments
- As a last resort, consider factoring your accounts receivable. Factoring involves selling your receivables to a third party who collects on your behalf. Your cash flow is immediate, but factoring companies will take a cut of the action, much more than a bank will for a line of credit.
- Bill your customers as soon as you ship your product or deliver your service. If you wait for 30 days and then allow them 30 days to pay, you have in effect given them 60 day terms. That’s not a good use for your money.
- Consider a penalty for late payments. This may motivate clients to pay on time.
Your own accounts payable and bank debt
- Don’t pay your vendors early
- Negotiate temporarily extended terms with vendors, during particularly difficult times
- Look at refinancing or consolidating bank loans for lower rates or extended repayment terms
- Lease equipment instead of purchasing. This can save cash flow but it could increase the long-term cost of the equipment.
These are just some of the things you can do to help with managing cash flow for your businesses. But remember, profitability is the only long-term generator of cash.