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16 Ways to Improve Your Cash Flow

ONE OF THE challenges of running a small business is dealing with the feast-or-famine nature.

I’m talking not just about the flow of business, but also the flow of cash into and out of the business. Here are some helpful ideas for improving your small business’s cash flow:

Speed up your incoming cash: This is the area where business owners usually look for a quick solution. After all, most of us have heard the laundry list of best practices from a financial perspective on how to improve cash flow. Some of these traditional but important remedies include:

Bill promptly. Ever find yourself so busy building your business and making deadlines that you don’t get around to billing on a regular basis? You’re not alone. One contractor I know sometimes neglects to send out bills for small home-repair jobs until he approaches the deadline for monthly employer tax payments and realizes he doesn’t have the cash available to cover the payments due. If you don’t already have a system in place, start (or assign an employee to start) billing for projects on a regular basis. When taking on longer-term projects or clients, negotiate in advance for regular payments instead of allowing the amount due to build up until completion of a contract.

Run customer credit checks. Perform credit checks on all new and non-cash customers. This process can immediately reduce bad debt, since you’ll stop offering credit to customers who haven’t proved they deserve it.

Avoid slow pay/no pay customers from the start. The best way to avoid cash-flow problems because of customers or businesses not paying you is to weed out those slow pays/no pays out before they become clients. So if someone is about to become a significant client or customer, do your homework. Ask for — and check out — credit references. Call other businesses that have had a relationship with the client. You might even pay for a credit check from an organisation such as Experian or Dun & Bradstreet.

Create incentives for faster payment to you. Small businesses can sometimes significantly cut the time spent waiting for payment by offering a discount for quick payment. I’ve received bills from businesses offering discounts of 1% or 2% for payment within 10 days. If I was going to pay the bill within 30 days anyway, I’m likely to pay up straight away to get that little extra discount. Good for my bottom line; good for the business’s cash flow, too.

Use barter instead of cash. You could reduce the strain on your immediate cash if you need goods or services from someone and can barter goods or services of your own in return. Note: This is not a way of cutting any tax bills — you’re still required to report the value of the barter transaction on your tax return.

Trim your inventory. OK, so you can’t go to a “just-in-time” inventory management system like those that many manufacturers have adopted. How about “just-in-less-time”? Money spent on inventory is money that isn’t producing any interest or savings for you. (One exception: You can gloat about your “excess inventory” if you loaded up on heating oil last year at 85 cents a gallon.) Sometimes reducing inventory can be pretty simple. I’ve seen restaurateurs cut back on the size of their wine cellars, focusing on quality wines from a few regions instead of trying to be all things to all diners. If the customer still has good choices, it may not even matter that he has fewer choices than before.

Consider consolidating your loans. I know it’s often tough for small businesses to borrow money. But I’m surprised at the number of ways entrepreneurs do manage to borrow. One small business owner I know has only one employee, but has four different loans related to his business: an equipment loan, a car loan, a business line of credit and a business credit card. If you also have several loans related to your business, review the rates and terms on each one. You may be able to consolidate two or more loans into a lower-interest account and improve your cash flow. I’m generally not a fan of stretching out loan payments, but if you’re thinking of talking to a lender about consolidating existing loans into a new loan, you might look at taking on a longer-term loan in exchange for lower monthly payments.

Asking customers to pay by cash or credit card. Rather than sell on term payments, sell on cash or credit card payments. Once you’ve got the cash in hand, deposit the funds immediately.

Charge late fees. Indicate on your invoice when payment is due, and specify the penalty fee for late payment.

C.O.D. (Cash On Delivery). C.O.D. delivers cost savings and processing efficiencies that improve cash flow. This process may seem archaic, but the reality is that you’ll be paid faster with C.O.D. than a traditional 30-, 60- or 90-day term agreement.

Inventory financing. Have you ever thought about unleashing working capital generated from inventory that traditional banks won’t finance, such as inventory you’ve got housed overseas? What about moving that inventory to a different location that enables those goods to be financed? Unfortunately, many businesses simply throw up their hands in defeat when they learn that overseas inventory can’t be financed. But that’s giving up too soon. If you take a holistic supply chain approach, you’ll realize that realigning your supply chain can enable you to gain economies of scale, reduce inventory expenses and ultimately obtain additional working capital. Most traditional banks are simply focused on the money flow, not the supply chain.

Credit insurance. Today’s business environment pretty much mandates that small companies go global. But conducting business with trading partners overseas can be risky. Credit insurance can help mitigate the risks by protecting the value of your receivables. By guarding your bottom line against nonpayment–or even slow payment–of invoices, you can breathe easier about your decision to conduct cross-border trade. And credit insurance can be used on a case-by-case basis–for example, with new customers whose payment histories you’re unfamiliar with. Once you’ve established a more solid relationship with them, you can then stop charging them for the credit insurance.

Add employees cautiously. Fast-growing companies often find themselves in cash-flow crises because they build their work forces based on contracts that may not pay off for months.
Delay hiring workers as long as you can, Shim says. Instead, look for ways to maximize your own productivity and that of any existing employees or consider lower-cost alternatives, such as outsourcing work to independent contractors.

Lease rather than buy. Equipment such as computers can increase productivity, Goldstein says, “but lease rather than buy to save cash. A lot of companies go this route with company cars, because the lease payments are tax-deductible.”

Sell unnecessary assets. If you buy rather than lease assets, consider selling unnecessary equipment to raise cash. This “garage sale” can include company cars, inventory or equipment.

Recycle and reuse. Never throw away something you’ll need again. Reuse file folders, computer disks and packing boxes.

Until next time… Onwards and Upwards!


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