Cash flow is often called ‘the lifeblood of a business’, and for several good reasons. But the flow of cash into most businesses is uneven and there can be times when a constrained cash flow creates serious problems, even if the long term situation is positive.
There are, however, ways to improve the cash flow of any small business and remove some of the worries about bills not being paid or not having enough on hand to pay wages. These mainly involve no more than adjustments to what you’re already doing and so aren’t difficult to implement.
Keep inventories as low as possible
Inventories are expensive in many ways. There’s the interest paid on money borrowed to acquire items that are awaiting sale. There are also the costs for storage space and handling, as well as insurance expenses and the ‘opportunity cost’ of what money spent on inventory could be earning elsewhere. In some cases, inventories are so badly managed that much of the material becomes obsolete before it can be sold.
Having too much inventory is an indication that business process problems exist in the organisation. Some of these problems include poor sales and operations planning, inaccurate forecasting, ineffective production scheduling, and the existence of bottlenecks in one or more systems just to name a few of the possibilities.
Inventories can be reduced by focusing on fast turnover lines or cutting down on the number of items in stock by negotiating with suppliers for faster replacements. Improving sales forecasting and optimising production planning are other areas to look for improvements.
Making minor process changes and a better utilisation of processes and systems already in place will allow most businesses to achieve an inventory reduction of 20% or greater quickly and without a great deal of expense.
Reduce your repayment obligations
Even the smallest business probably has at least one loan for stock and operating expenses, a loan for a motor vehicle, a loan for some form of capital equipment, and a credit card or two for travel and entertainment.
You can save a great deal of interest and improve your cash flow position by consolidating as many of these loans as possible into just one monthly repayment and negotiating a loan term that’s in line with your cash flow and income projections rather than have it dictated by past conditions that may no longer apply.
Watch your invoicing
Prepare your invoices promptly and send them out on a regular basis. Customers are more prepared to pay a bill on time if it’s received shortly after they’ve received their goods or services. The longer you wait, the longer they’ll wait to pay you.
Reward C.O.D. or fast payments
A discount for cash or fast payments is a good incentive for customers to pay you quickly – even ahead of other creditors who don’t offer a reward for early settlement of their accounts. The old system of ‘2% discount if paid in ten days or the net in thirty days’ still isn’t bad if you can communicate it and enforce it, although payment within sixty days is now more common if customers are allowed to get away with it.
Credit check every customer
Some small businesses make the big mistake of taking on customers solely on the basis of their appearance. If the customer pays cash for their first order they might even forego a credit check. This can be a big mistake that leads to massive cash flow and debt collection problems. Give every customer a thorough credit check and if in doubt ask for references from other firms before letting them run up a bill with you.
Try bartering for what you want
Because bartering uses something in your inventory to pay for something your business acquires it can benefit cash flow to a degree. Bartering can be particularly beneficial for service businesses with unused capacity, such as a plumber exchanging labour for capital equipment. Bartering also offers some valuation flexibilities that can increase the value of benefits received.