6 Tips for growing business cashflows
Cash to a business is what oxygen is to humans…life! The old adage “cash is king” is indeed true. Without sufficient cash, businesses are unable to meet their commitments as they become due (salary, rent and loan payments, to name a few). Research shows that 50% of small businesses fail by their 5th birthday due to an inability to generate consistent, positive cashflow. In most cases. these business owners do not have the inhouse expertise to help them implement successful cashflow management strategies.
Below are 6 tips to consider implementing to improve your business cash flow position:
Prepare accurate Cashflow Forecasting- Many business owners plan for various future initiatives including preparing sales projections, however they often fail to prepare cash flow projections. These projections are equally as important as all the other company wide projections. Cash flow projections indicate when future shortfall in cashflow may occur, or where there may be future cash surplus. This allows business owners to proactively plan for these cash events. For example, projected cash shortfalls can be addressed by taking out a bridge loan or line of credit or a draw down of cash reserves. On the other hand when a cash surplus is projected, arrangements can be made to move the excess funds into cash reserves. This may take the form of a short term interest earning CD or a separate interest earning savings account.
Reduce outstanding accounts receivable days/increase accounts payable days- In order to improve cash flows, the goal should always be to shorten the required payment terms for your customers as short as possible, whilst negotiating the longest payment terms possible with vendors. Under no situation should your organization be paying your vendors quicker than you are collecting accounts receivable balances. This is a recipe for creating cash deficiency. Customer collections can be improved by offering discounts to incentivize faster payments, requesting deposits on large, lengthy contracts and utilizing mobile payment solutions to get paid quickly.
Reduce inventory days & eliminate obsolete inventory- Excessive inventory purchases is one of the biggest mistakes that small businesses across all industries make. This has a negative impact on cashflow. Businesses should strive to balance reducing inventory purchase sand having a suitable level of inventories to enable them to operate normally. Where possible, business owners should consider investing in a Just-in-Time inventory management system to minimize cash tied up in inventories. Additionally, ongoing inventory monitoring should identify existing obsolete inventory. These should be sold off as soon as possible to provide an infusion of cash.
Maintain operating reserves - Many businesses experience peaks and valleys in financial performance, depending on customer demand for their products or services. Any surplus cashflows realized during peak performance should ideally be set aside in an interest earning reserve account. These reserves can provide your organization with ready access to cashflows when there is a slow down in business and resulting reduction in available cashflow.
Activate a bridge loan or line of credit- Cash is king, however, a bridge loan or line of credit can prove to be pretty royal as well. This facility should be used used to address cash flow shortfalls until significant accounts receivable balances are collected. For eg. a company signs a large contract with the federal government, which requires significant investment in new staffing or capital purchases. The business cold access its bridge loan or line of credit facility to make the necessary purchases required under the contract. The facility would be paid down once payments have been received under the contract. The loan facility should never be used to make payments, with no defined strategy to pay it down.
Effectively manage operating & capital purchases- Start up and emerging businesses that have not yet attained a break even position, should pay closer attention to capital purchases than more mature companies. Depending on the nature of the business and the stage of growth, leasing of capital assets may be a better cashflow solution than purchasing. A cashflow and cost analysis of purchasing versus leasing should be performed in order to make the correct decision. Another significant business expense which ties up significant cashflows is salaries and wages. Smart hiring is critical. Business owners should consider whether it is a better cash flow option to outsource certain positions. Again, a detailed cashflow and cost analysis of both options is recommended.
The ability to generate consistent positive cashflows is a crucial component of any successful business. Our firm partners with small and emerging businesses to help them achieve optimal cashflows. Give us a call today at (813) 489-0295 or email info@waandersoncpa.com.