Strategies to Improve Cash Flow for Your Small Business

Diagnose what’s causing cash flow problems

It is important to diagnose the cause of cash flow problems. The lack of cash flow is a symptom that results from underlying causes. Addressing the underlying cause for the poor cash flow is the first step in its resolution.

Implementing strategies to fix poor cash flow without diagnosing the cause is akin to a doctor diagnosing a patient a disease without knowing the cause. Treating a cash flow problem without understanding the underlying cause can create unintended issues.

How do you diagnose cash flow?

As a previous post indicated, you need to have four key tenants in the management of cash. There are many levers owners of middle-market companies can do to move the needle on improving cash flow.

Companies over a million in revenue have options to help reduce cash burn. Some are hard decisions, but with quick action, one can improve cash flow double-digits percentages.

Increase Prices. As part of your annual planning companies should plan on increasing prices. That increase should minimally be 2-3% per year. The main reason is that expenses in your operations will be increasing by some inflationary factor anyway.

If you have lots of items in your inventory, an annual price increase is warranted to help cover the rising cost of goods and inflation.

Challenge cost of goods sold

Cost of goods sold is typically one of the most expensive line items in your income statement. It can be reduced in many ways. One way is to attack what your unit cost and engage vendors to lower your cost per unit.

This is a key value and can make a big difference. Explore getting discounts for increased purchase volumes, but this can eat in into cash savings.

In times of shortages of cash flow, it is better not take discounts. Discounts can be valuable to cash conservation is more important to the cost of not having the cash. We will explain in another post.

Stretch vendors out to the maximum amount regarding timing for the payment. Be aggressive with vendors and shop for other vendors if you cannot come to amicable cost adjustments.

Challenge all components of cost of goods including vendor shipping rates, storage costs and any other cost influencing the total cost of goods.

Don’t forget to challenge labor costs. This may be harder, but the bottom line is getting more efficient and then lower cost by reducing payroll and staff and be a huge time saver. Explore all options for reducing payroll.

Expense Reduction

There should be a systematic review of all expenses. From the largest to the smallest with prioritization of timing. Some costs will be harder to cut and may take months actually to act upon; others can be easier to cut but offer smaller savings.

Balance size and speed of action to ensure savings are captured as soon as possible. Many financial managers believe comparing against budget is a technique to use and if you are over budget, then you cut. We are of the opinion that when you are in need of incremental cash, ignoring the budget and assuming all expenses are on the table will be more fruitful.

Get everyone involved including the staff that spends the expense to provide ideas to cut expense. After all expense options are exhausted, cutting payroll cost should also be on the list of options.

Engage Lenders

Always keep your banker informed particularly if your bank and have a loan from the same company. Alert them as early as possible if you are having cash flow issues. Let me know what you are doing in case you may need to apply for incremental financing. There will not be much you can do about loan payments, but it will not hurt to ask.

Accounts Receivable

• If you have accounts receivable devising a comprehensive plan to improve collectability will improve cash flow. The following techniques can improve cash flow if implemented effectively.

• Collect deposits before work starts on projects

• Offer small discounts 1 to 2% for early payment.

• Deliver options to customers on the various ways to pay.

• Do not delay in the issuance of invoices and use automation to expedite their completion.

• Systematically review the aged receivable report and consistently follow a methodology to collect and follow up overdue accounts.

• Devise payment plans for customers who cannot pay the whole amount and be flexible and arrange a payment plan.

• Take a payment against the amount owed and then request payments at to at regular intervals. Even request payment by credit card if that is feasible.

Inventory levels and holding cost

Controlling inventory levels has gotten much easier with automated inventory management systems. However, leveraging those systems effectively is still a major challenge for many businesses.

When there isn’t enough inventory on hand that could lead to lost revenue. Having to much inventory can lead to impair cash flow, due to holding costs. Businesses usually have too much instead of the other way around.

When you have too much inventory then holding cost, the cost of warehousing and labor for that also increase. Many businesses never consider the hidden costs of holding too much inventory which is a missed opportunity and an incremental drain on cash. The key is demand (sales) planning to ensure what you buy is what you sell in a reasonable time frame.

There are tons software packages that assist in managing inventory and improve the chance of guessing right on the amount and timing of inventory purchases. Be aggressive with the sale and discounting of old and outdated inventory by packaging together or creating special bundled sales.

Some companies make the mistake of buying too much inventory because they obtain a significant discount, they focus on the discount as appose to the expected sales to determine just how long will it take to sell the inventory.

The golden goose is when you a hot selling item and you can buy in large quantities knowing it will sell quickly. Basic inventory management which most warehouse management technology will do easily and will even set minimums and maximum levels of stock and help you stay within the applicable parameters.

Accounts Payable

Making sure you have purchasing procedures that defend against expense creep. Bills are sometimes overpaid due to lack of proper procedures which can also lead to a litany of other problems. Such as purchasing too much or paying for undelivered goods.

For example, it is common for payments to be made on a statement and yet not have an invoice to verify the purchase. Automate bill payments so that you can execute payments same day bills are due. This is one of the best methods to control cash flow.

In its basic form, there should be procedures for payment of goods that require the matching of a purchase order, delivery confirmation, invoice, and statement. Larger businesses either have an automated system or the complexity of the paper flow will be more significant. Again, there are a ton of applications can make this process extremely simple.

Always pay your creditors on the day the invoice is due. Do not pay early or late. Negotiate longer payment terms or a payment plan if the business is struggling. Negotiate discount for early or up-front payment.

Reduce payroll

We recommend exhausting all options before considering payroll. However, it is one of the largest if not the largest expense of most companies. We will go into significant detail on how to effectively challenge and then implement cost cuts in this large and important category.

To your success on the next level

The NexLevel Business Team