Tips for generating more cash in your business
Good cash flow management is one of the most important factors in building a healthy, growing business.
Cash flow management isn't complicated and is well worth the effort because it can help you avoid financial stumbles, says Nigel Robertson, a BDC executive and trainer who specializes in financial management.
Make cash flow projections
The first step is to make a cash flow budget for the coming year. Using a spreadsheet, enter expected cash inflows and outflows on a monthly basis, along with any major anticipated capital purchases and financing needs.
Then monitor your actual inflows and outflows, looking for variances from your projections and taking action to ensure you will have enough cash on hand to meet expenses.
Your cash flow budget is also where you can experiment with "what-if" scenarios. Use it to see the impact of various initiatives, such as increasing prices, making a machinery purchase or stopping doing business with your slowest-paying customers.
Helps answer strategic questions
"It's a tactical tool you can use to answer strategic questions," Robertson says. "It's easy to learn for entrepreneurs, and it gives you big-company sophistication."
Now you're ready to take steps to increase cash flow in your business. Robertson offered a series of tactics you could use to accomplish this important business goal.
- Seek a business loan—If you use everyday cash to pay for growth projects such as buying equipment, you may be setting up your business for a cash crunch. Instead, get a business loan that helps you to plan your budget on the basis of fixed payments.
- Sell-off inventory—Many businesses have old inventory taking up space. Look at what hasn't sold and liquidate it, even at a loss.
- Shed products—Consider shedding product lines that don't sell well. Faster inventory turnover could mean lower interest on your line of credit and more profit for you.
- Sell off assets—Do you have unused equipment, machinery or other assets you could sell to generate cash? You may even free up floor space in your premises to rent to another company.
- Fire deadbeat customers—Consider dumping your most troublesome customers—those who pay late, complain incessantly or return products frequently. They drain attention and resources from your best customers.
- Talk to your bankers—If you're finding cash flow tight, consider approaching your bankers for a temporary postponement of principal payments.
Robertson also suggested a few ideas to conserve more cash in your business.
- Consider variable pay and reduced hours—Tie some of your employees' pay to actual business performance. If you're in a cash crunch, consider temporarily reducing employee hours.
- Renegotiate your lease—Ask your landlord to renegotiate your lease. Or offer to make reduced payments now and make up the shortfall in future months.
- Stretch payments—Offer to pay your suppliers slightly more—1% for example—if they give you longer to pay
To compare your financial performance to that of other companies in your industry, check out our financial benchmarking tools.