There are so many things to manage when you run your own business that it’s hard to pinpoint the most important measure of business health. Is it how big your business has grown, its borrowing capacity or the end product itself? Many small business owners would argue that no measure is more important than cash flow. Without a healthy cash flow to pay staff and settle bills that can’t be postponed, you can go out of business overnight – even with attractive profits on paper!
Growing too quickly as a company can be even more dangerous than growing too slowly – without controlled expansion and a good cash flow, it’s easy to run out of money fast. However, there are ways to increase your business cash flow to ensure you have enough available to pay creditors and suppliers as well as fund growth. Here are 5 of the best ways to maintain your business liquidity.
1. Chase down unpaid invoices.
Most small business owners cite late payments by clients and customers as the single biggest reason for cash flow problems. Most slow-paying customers are simply taking advantage of you to boost their own cash flow. If they genuinely didn’t have the money to pay, they’d be out of business by now. Make sure you get paid on time by sending a friendly email reminder at least a week before your payment is due. In addition, introduce incremental financial penalties for persistent late-payers.
If you’re still not getting your money, negotiate a payment plan or pass the account on to a debt collection agency to chase up for you.
2. Manage inventory wisely.
While it’s important to have sufficient and varied stock to satisfy customer demand, having too much sitting on the shelves can be costly for your business. As well as the risk of stock remaining unsold, there are storage costs to consider. Inventory is one of your business’ least liquid assets so try to stock only popular and fast-moving items and phase out stock that’s slow to sell.
You could also consider getting your suppliers to drop ship directly to your customers. To determine which items fly off the shelves and which gather dust, you should keep careful records and analyse your data regularly.
3. Get a better deal from your suppliers.
As well as imposing late-payment penalties on tardy customers, you should try to arrange trade credits from your suppliers for early payment. Negotiating a discount of even 1% or 2% for settling your bill in 14 days rather than 30 will generate far more money for your business than you’d get leaving it in the bank. However, if you’re paying suppliers early but waiting a long time to get paid by customers, you could be creating cash flow problems for your business. In that case, it may be worth offering an early-payment discount to your customers as well.
4. Consider how to finance your business growth.
If you’re seeking to expand operations rapidly, it may be difficult to generate sufficient funds from net earnings or cost-cutting measures. While many companies do self-finance this way, you could also consider short and longer-term finance options to leverage your expansion.
You don’t have to rely on your local bank manager to approve a fixed-term loan. There are a wide range of lending options, including Invoice Financing, Asset-Based Lending, a merchant cash advance, peer-to-peer lending, start-up loans and business grants, lines of credit and more. If you decide to borrow money, make sure it’s generating more income for your business than the cost of paying it back. If interest payments will harm your cash flow disproportionately, find a more sustainable way to fund your business growth.
5. Increase revenue with new growth strategies.
There are many ways to diversify and expand your core business, such as seeking out new geographical markets or customer markets as yet untapped. You could also consider expanding your range of products and services. Start by identifying those that would be a natural extension of your core business before embarking on something completely new – it’s easier to carry your existing customers along that way. Expanding operations by forming new partnerships and alliances with complementary brands is another possibility, as is franchising. However, don’t get too ambitious without making sure you can afford it first.
Increasing your cash flow will reduce the risk of money running out due to late-paying customers or rapid expansion plans. With enough ready cash to hand, your business will be in the best position to handle growth when the time is right.