One of the most important parts of a business is managing cash flow. Over the last year, we have spoken with many business owners who have trouble managing this. It is one of the leading causes of failure for a business. Now more than ever, this is the #1 priority of business owners. With the world full of uncertainty, learning to stabilize your cash flows is key. When companies get in a pinch, many turn to cutting rather than looking for opportunities. Here are several opportunities to improve the cash flow of your business.
Analyze your cash flows
How do you manage cash flow when you have no idea where you are at currently? There are many accounting tools out there that make it very simple to account for your cash. If you do not have time, hire a bookkeeper to manage your books.
You need to get in the habit of tracking your cash flow month-to-month to determine if cash levels meet the business needs. If you are tight on cash, work to shorten the collection cycle for receivables and to extend the payment of liabilities.
The better you are at monitoring cash, the more successful your business can become.
Liquidate unused assets
Do you have equipment or assets that are simply lying around? Consider selling it to generate quick cash. This could be equipment you are no longer using or inventory that is becoming obsolete. For instance, a company we worked with sold its inventory at cost in order to increase its current cash position.
Furthermore, it is important to understand the movement of inventory in your company. This will help you determine which items are selling and which ones are soaking up working capital. Keeping inventory levels lean can help the business be more productive and profitable.
Speed the collection of receivables
One of the biggest issues we see is having extensive accounts receivable. Timely payments are essential for positive cash flow. If payment for a service or product was instantaneous, cash flow would never be a problem.
The first step to increasing cash flow is sending invoices prior to work being completed or products being delivered. Sending invoices prior starts the clock. In addition, make sure your invoices are being sent to the individual who oversees paying them.
Design your invoices so they are straightforward and easy to read. Highlighting key items like due dates, the amount, where to send payment, and payment methods can help.
Speed up turnaround time up by following-up with outstanding accounts. Consider delegating this task to a member of your team who is trustworthy and persistent. Contacting customers periodically to collect payment will help quicken collection times.
Lastly, consider offering a discount to customers who pay early or ask for a deposit payment at the time of order. For customers who are slow paying, initiating a ‘cash on delivery’ policy can help.
Eliminate non-essential expenses
One of the best ways of managing cash flow is to stay on top of expenses. Analyze your expenses to see where you can cut and control costs. A few expenses to consider include monthly recurring expenses and subscriptions. Additionally, a business can reduce costs by renegotiating insurance, loan terms, and/or leases.
Apply for a disaster relief SBA loan
With the current events surrounding COVID – 19, the federal government recently announced an Economic Injury Disaster Loan assistance program. This program Is for businesses who are suffering from economic injury as a result of the Coronavirus (COVID – 19). These loans have low-interest rates and are being given with the intent of helping small businesses with working capital.
Use a business line of credit or credit card
Lastly, a business line of credit or credit card can also aide short-term cash flow. Both provide a cushion for lean times and can bridge the gap between payables and receivables. Keep in mind lenders typically prefer lending before businesses need it.
Credit is best for short-term problems rather than long-term. They can only carry your business so far, once your lines of credit max out, you may be left needing cash or facing the reality of closing the doors.
Staying on top of cash flow is essential to the success of your business. Neglecting cash flow can leave you in a money crunch. Begin now to implement tactics to improve your business’s cash flow.
If you find yourself struggling to manage cash shortfalls, it doesn’t mean you are a failure. There are many strategies to help. The better prepared and earlier you are aware of the problem the faster you can fix it.
Peak Business Valuation can help identify current and potential cash flow problems through a business valuation. We focus on helping small business owners buy, sell, or grow their company. Questions are always welcome! Please reach out via email or through a phone call.