If you have been in business for any length of time, not only have you heard the statement “Cash is King,” you have experienced it too. In this difficult economy the person with cash rules and the person who is out of cash will do almost anything to “serve the king.” The person with cash can buy things at a deep discount from the person who does not have cash.
In some ways “bootstrapping,” the slang word for starting and running a business with little capital can be a positive thing. It forces you to live within your means or fail. Being in a survival mode can be helpful if you maintain that mentality as your profits grow. On the other hand, being under-capitalized is the primary reason that most businesses fail. It is a major source of stress for business owners. You need to know where you are financially and have a plan for covering your obligations. Most importantly, you need to have some cash left for you!
Covering Your Monthly Obligations
As a business owner you can be flooded with customers and still drown in a sea of expenses. Your business has fixed expenses that have to be covered every week and month, such as payroll, loans, rent, utilities, phone and advertising. In addition you probably have variable expenses which are tied to your sales activity. When your sales rise and fall, variable expenses rise and fall along with your sales. Some examples could include hourly payroll added for increased activity, or credit card fees, or cost of goods sold.
However your sales may be sporadic, or there can be a delay of when you get your money. If you own a seasonal business, going into a peak season can literally put you out of business. Usually there is a lag in cash coming in on sales, but of course there is no lag on your fixed expenses. One of my former businesses had a revenue increase of 400% from our off-peak to our peak season. You can bet that we learned a few things about managing cash flow!
You basically need to predict two things: what your money coming in from sales this month is going to be, and what your total expenses for this month are going to be (fixed and variable). If you expect to have more money coming in than money going out, and if you deliver on that prediction, you have positive cash flow. You want to be cash flow positive all the time, but that can be difficult when you are starting out and growing your business. You don’t want to spend too much, especially if your sales are not growing as predicted.
Here is my top ten list of ways to improve your cash flow:
1. Implement cash flow budgeting and management. As I mentioned earlier, you should do this monthly. If your sales are falling short of your predictions, cut back on your expenses.
2. Promote credit card and cash payment at the time of the order. Collect by cash or credit card upfront rather than waiting until after the product or service is rendered. If the customer asks for terms, get their credit card number as security for payment.
3. Improve payment terms on extended projects or services. If you cannot get paid the entire amount in advance, then collect a substantial deposit at the time of order, then additional payments during the term of the contract. Don’t deliver the final product until you have been paid in full.
4. Make a portion of your payroll variable. Rather than guaranteeing a salary to all of your employees, only pay them when you need them. Link payroll to sales activity. You can hire independent contractors. You can employ seasonal workers with the understanding that their work hours are reduced or eliminated when business is slow.
5. Discounts for timely payments. You can offer a small discount if invoices are paid within 30 days. Many businesses offer 1%- 2% discount.
6. Negotiate extended payment cycles with vendors during peak seasons. Go to vendors in advance when you don’t have any past due obligations, and simply explain your cash flow cycles. If your vendor is not flexible, shop around.
7. Do a credit check on new customers. As an alternative you can also buy credit insurance that covers non-paying customers.
8. Track inventory and supplies. Identify waste and make improvements to save money.
9. Shorten product or service cycle times. Shorten the delivery time of the product or service and you will get paid faster.
10. Have a back-up plan and emergency strategies. Strategies can include having a cash reserve, having a line of credit from your bank in place(you can use accounts receivables or inventory as collateral for a line of credit), or even keeping some low interest credit cards with zero balance. Be sure to keep the balance zero in non-emergencies!
We were recently working with a client that had a severe cash flow shortage. We identified seven areas of improvement that added $176,000 to his bottom line and dramatically improved his cash flow in 30 days. Although his cash flow had been poor for ten years, we were able to solve his problem in three meetings with the owner and his staff!
A wise saying is “you get what you focus on.” If you will invest some time each month in cash flow management, you will make sure that you have enough cash to keep your business going in the right direction. Then you can be crowned as “The Cash King!” You will be able to grow your business. You will have less stress. You will also be able to seize some opportunities that come your way.
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