Concerned about Cash? 4 Ways to Safeguard your Cashflow
Few things stress a business owner more than running out of cash. It really is the lifeblood of your business and when you’re out of cash, you’re probably out of business.
Considering how important cash is to your operation, you’d expect business owners to be pretty sophisticated when it comes to tracking it. Truth be told there are a large percentage of small business owners who measure success based only on how much money is in their business bank account. There is also a large percentage that measure how well they are doing solely based on top line sales. To run a healthy successful business you need to know your numbers. Striking the proper balance of cash flowing through the business and building up an adequate reserve to weather soft periods is critical if you want to have a business designed to seize opportunities when they arise.
Your company may have a net worth of several million, but if you only have $10,000 in the bank with little or no revenue coming in you will be out of cash in no time just paying salaries and utilities. Typically the faster a business is growing the more they tend to struggle with cash flow and having cash reserves on hand. But established businesses can fall into the same trap as high growth companies if they don’t take the time to watch their numbers.
There are many areas in a business that can tie up cash. Knowing where to look and setting a few parameters will help keep your business running smooth in good times and be better prepared for slow times. These are 4 that every business should focus on.
Invoice Promptly: Most businesses pay invoices at a minimum 30 days, some companies only pay a couple times a month. The bottom line is the clock does not start ticking until your customer receives the invoice. If you invoice 2 weeks after the fact, you just gave your customer 2 extra weeks to enjoy whatever was purchased from you and you are getting nothing for it. If that work included your business spending money (cost of goods sold) you have unnecessarily strained your business for 2 weeks. What would it take to get that invoice out right away?
Cash Reserve to cover 3 months of fixed expenses: Depending on your business this may take time, but building cash reserve that pays the fixed expenses even if your business doesn’t sell a thing allows you to not have to borrow money just because your business has a slow month. It puts you in a position of power to establish a business line of credit (for bigger emergencies), because you aren’t in a panic to get it. In the event of a “fire sale” you can be the buyer and not the seller.
Manage your Inventory: If your business requires it, you have to manage it. Overstocked inventories can tie up substantial amounts of cash in a business. You need to know the turnover ratio for your industry – it’s easy to calculate (COGS / total inventory value) Holding on to old inventory, obsolete inventory will only guarantee the price you sell it for tomorrow will be less than today. Also don’t be tempted to buy bulk, if the excess doesn’t help you with inventory turns. They money you get saving in bulk may actually be costing you. Ever end up throwing out food you bought from a warehouse grocery store?
Review all your expenses: Start by printing a report of your vendors and reviewing them one at a time. Expenses also include employee reimbursement, auto expenses, suppliers and benefit packages. Depending on the circumstances, having clearly defined guidelines for your employees regarding expenses and timely report submitting can make a dramatic impact on cash flow. When is the last time you asked a vendor to review their pricing? To get discount terms for early payment? Compared insurance rates? 100% of the money you reduce in unnecessary expenses is additional profit and cash to your business.
What about your business? Where are some of the areas you have found that focusing additional effort has improved your cash position and overall business health? Managing your cash is just one component of running a successful healthy business, but it’s an important one and it won’t happen on it’s own. Managing cash flow can be challenging, but be assured it is always rewarding.
What do you think? We’d love to hear your thoughts in the comments below.
Chris Steinlage Kansas City Business Coach