Strategies to improve cash flow

STRATEGIES TO IMPROVE CASH FLOW

Keep a close eye on your books
Too many business owners take a quick look at their books and pronounce their finances fit without truly understanding their cash flow situation. While an increase in sales or a solid bank balance may put you at ease, neither one necessarily translates into healthy cash flow. Take time each month to prepare and review financial reports — especially a cash flow statement that specifically details the funds moving in and out of your business. Many accounting software programs (such as QuickBooks or Peachtree) can create these reports for you. Speak with your accountant or financial advisor to learn more about what to look for in these reports.

Pay bills intelligently
One good way to conserve your cash is to make the most of vendor payment terms, which are essentially interest-free loans from your suppliers. Take the maximum amount of time allotted (often 30 or 60 days) to pay invoices — for example, if an invoice is due on the 15th of the month, don’t pay it on the 1st. Many businesses now use electronic bill payment solutions, which let them set the exact date a bill is paid and money is withdrawn from their accounts. Talk with your bank to find out if this option is available to you.


Take advantage of incentives
The only time you should pay a bill early is if you get a discount. Some suppliers may offer an incentive for paying their bills quickly, typically within a week or two. It may be worth taking them up on the offer. Think of it this way — a 2% discount on a 30-day invoice translates into a 24% annual return if the money was invested. If your vendors don’t offer this, ask for it — they may be willing to do so to speed up their own cash flow.

Organize your receivables schedule
Slow-paying customers are the root of many cash flow problems. Don’t let invoices lag. Put yourself on an invoice tracking schedule using your accounting software. Not only can these programs generate invoices, but they can automatically classify accounts receivable by age — e.g. less than 30 days old, between 30 and 60 days, between 60 and 90 days, etc. Review your accounts receivables aging reports frequently so you can take timely action on overdue invoices.


Control your inventory
Money tied up in inventory can dramatically impact cash flow. Retailers and manufacturers are especially vulnerable in this area. Retailers should regularly gauge their inventory turnover ratio (cost of goods sold divided by the average value of inventory) to make sure it is within industry norms. Old or outdated stock should be cleared out through end-of-season sales to turn stale assets into liquid ones. Manufacturers can use supply-chain management tactics to have just enough inventory on hand to keep product lines running and meet customer commitments without tying up critical cash.

Consider leasing
Over the long run leasing costs more than purchasing, but its cash flow benefits can still make it a prudent choice. Leasing computers, cars, and the like lets you avoid tying up cash or lines of credit that might better be used for running your day-to-day business. Lease payments are also considered a business expense, so the tax benefits are maintained even though the items are not purchased.

Check your prices
Make sure your prices keep pace with rising costs. Many small businesses hesitate to increase their rates because they’re afraid they’ll lose customers. Customers actually expect their suppliers to institute small, regular price hikes. Also, check your competition regularly — if they’re charging higher prices, maybe you should, too.

Always get the best deal
One of the biggest cash drains is spending money needlessly. Avoid this by comparison-shopping for products where service and other value-adds are not critical. Buy in bulk to get price breaks for goods you regularly use in your business. Get quotes from competing suppliers for capital equipment. Also, check deliveries against invoices to be sure you’re getting what you ordered and that you’re being charged the correct price.

Healthy cash flow is really about making every dollar count. Make the time and effort to manage your cash flow effectively, and you’ll be on the way to long-term profitability.