SMALL BUSINESS

From Trickle to Torrent: 8 Steps to a Healthy Cash Flow

Cash is the life-blood of all business. Lack of available cash can cause an otherwise thriving business to weaken or even fail. Generating healthy sales revenue is vital to a profitable business, but proper cash flow management is equally as important, since cash inflow seldom matches expense outflow. Below are some rule-of-thumb items to consider when developing your business cash flow strategy.

1. Project and track revenues and expenses.
Develop a realistic cash flow spreadsheet with at least a three-month forecast. Project your sales revenues based on a specified period and spend accordingly. Monitor actual sales to make sure you’re on track. Same for expenses – each month, compare projected to actual expenses. You’ll be better able to see a potential cash-flow shortage coming and take action to prevent it.

2. Keep inventory moving.
Excess inventory ties up your funds; too much of it can greatly reduce your business cash flow. Make sure your inventory turns over at a regular pace; if it doesn’t, consider moving it at a discounted price. Also, don’t order too far in advance.

3. Pump up the volume for a better deal.
Take advantage of quantity discounts offered by suppliers, with price reductions given for large purchases. These reductions are generally based on either cumulative quantity discounts for supplies purchased over a set period of time; or non-cumulative quantity discounts, where the price reductions are based on the quantity of a single order.

4. Bill promptly.
Bill a project when it’s complete and invoice products as soon as they ship. Set up an accounts receivable process that lets you record sales, generate invoices and monthly statements and track your customers’ current and past-due balances. Offer discounts as an advance-payment incentive. To reduce time lag between shipping and receipt of payments, consider weekly or semi-monthly invoicing.

5. Stretch out payables.
Conversely, don’t pay every bill as soon as you get it, especially non-discount bills; these should be delayed as long as possible without compromising good relations with your suppliers. If they do insist on earlier payment, ask for an early payment discount. Don’t hesitate to take advantage of credit offered by suppliers, and feel free to negotiate for more favorable terms.

6. Cut out the excess.
Bad spending habits are often picked up when cash is more plentiful. Take a hard look at your expense column on your cash flow chart; is there anything you purchased that isn’t absolutely vital? Are there any purchases that you could have found at a better price?
Cut down on unnecessary monthly expenses and watch your savings add up.

7. Create a cushion.
By understanding your annual business income and spending patterns, you’ll have a better idea of when you’ll need cash. Use that knowledge to boost your financial reserves during high-income months, so you can ride out any expected (or unexpected) rough times.

8. Manage growth wisely.
Growth takes cash – a lot of it. Increased production costs (hiring more employees, expanding facilities, adding new equipment and purchasing supplies in greater quantity) quickly drain cash reserves, since they are incurred before the first dollar of income is generated. Figure out what your expansion will cost, and make sure you have the cash to cover it.