The cash flow of a business – whether a small-scale or big-time business – is the feast and famine nature when money coming into the business becomes tight enough to risk not supporting underlying business activities it formerly supported. A funny twist to this is cash flow problems don’t really affect the larger businesses as much since they’re the ones usually with strong ties to banks or other institution willing to loan them money (take the financial downturn of 2008 for example, many smaller businesses will crash out of existence without anyone taking note as it’s only the big boys that have received bailout funds from government).
Cash flow problems are not restricted to businesses alone as individuals are also exposed (sometimes more) to these problems. This article tends to lean on improving cash flow from a business perspective, but some points remain valuable for individuals in need of assistance.
1. Create a Cash Flow Projection
Cash flow projections are not always thought as necessary by small businesses, this is why they all too often fail within shorter periods. Many experts will rank a cash flow projection just next to a business plan in its level of importance. In fact a comprehensive business plan should have a cash flow projection attached.
The projection doesn’t have to be a complex piece of accounting outsourced to that expensive firm. Some money managing software will let business owners create their own projections with little help. And although the initial projection is more of a guess work estimate, subsequent weeks, months and years in business, should give enough experience for a more solid projection.
2. Itemize the Bills
Amongst every bill paying activity, taxes and the workers salaries should always come first. Next important things are the utility companies, credit card bills, and every other bill you’re less likely to be able to renegotiate. Suppliers are usually more flexible to accept a little delay without an adverse effect on business activity. Another great method of avoiding a cash strap is to pay bills just how they come. If you don’t have enough money for this, paying according to the order of repercussions is yet another great method.
3. Consider Reducing Inventories
A business could decide to reduce its inventory during the period projected as that of bringing cash flow problems. Inventories should be lessened based on non-fast moving items. For example, a restaurant can decide to eliminate some dishes from its menu during a certain period so there’s enough money to go round on purchasing ingredient and maintaining business activity based on the customer favorite dishes still in the menu. A shopping mall could also cut down on items stored until there’s more money to spend.
Items in inventory generate no income, so the idea of reducing inventories is to ensure every item in there is one that is a favorite amongst the majority of customers (meaning it’s a fast moving product).
4. Use Incentives for Debtors
Cutting off debts by a 1% or 2% may be an incentive for those owing you to pay up. Inform customers of this decision and also tell when your offer is going to expire. This method works with repetitive customers but may not for habitual procrastinators. Quick payment with the promise of a discount usually gets debtors to pay on time.
5. Save for the Rainy Day
I don’t know of anyone who has succeeded without planning for the rainy day. This might not be possible from a business perspective so here’s where a cash projection becomes useful. From the cash projection, you are well aware of those periods your business is likely to have cash flow periods. This gives you more time to prepare for such periods by implementing 3 and 4. A business with good credit and close ties to a financial institution might be able to pre-negotiation an overdraft facility for this period. Otherwise turn to those trusted suppliers and explain your situation – they just might be more willing to send goods for which you’ll pay when more cash is available.
As a business owner, always remember cash flow problems are synonymous and thus a side-effect of being in business, and shouldn’t be the devil in the closet you’ve always been afraid of.