Tips for building cash flow

Cash flow management is at the heart of every business, and that’s especially true in the rough and tumble world of retailing. Here, the line between liquidity and bankruptcy can be razor thin.

One of the key strategies is to develop excellent relationships with suppliers—a prerequisite for negotiating better payment terms during cash-crunch periods.

The observation that cash is king in business is hardly new. All that information won’t do your company much good if you don’t understand how money flows in and out of your specific business. There are a lot of recipes for managing cash flow, but where too many entrepreneurs fail is in understanding how to adapt those recipes to fit their particular business.

As a first step, companies need to understand and embrace three principles of cash flow:

  1. Understand how cash flows in and out of your company, and how that fluctuates throughout the year.
  2. Establish, and continuously update, a 12-month cash flow projection. Think of this forecast as an early warning system that will help you have enough cash on hand to ride out slow periods.
  3. If you don’t understand 1 and 2, get expert advice. Your business depends on it.

Put simply, positive cash flow means having more money flowing into your business than flowing out. Yet, not having enough cash on hand to pay bills is still one of the most common reasons companies fail.

It’s important to monitor the key indicators in your business — things like your bank account balance, accounts receivable turnover, inventory turnover and sales growth. Paying close attention to these metrics on a daily basis will help predict whether your company will have a cash issue or not.

Here are seven ways to find more cash in your business:

1. Develop a cash-flow planner and track cash throughout the month

Using a software tool or a spreadsheet, record your month-opening bank account balance and all anticipated cash inflows and outflows. This kind of budget allows you to assess your situation, examine risks and plan for problems, such as the loss of a key customer. Then, track your cash as it comes in and goes out throughout the month. That will help you stay on top of problems and make adjustments, such as delaying discretionary payments.

2. Closely monitor financial statements

Examine monthly financial statements line by line to look for red flags. Keep a close eye on key indicators of your business's health, such as changes in the gross margin and inventory turnover.

3. Look to relationships with your customers and suppliers

Good customer and supplier relationships can help you wring more cash out of your business. For example, you can turn sales into cash faster by offering discounts to customers who pay early. Suppliers can help by extending payment terms. However, it takes two to tango. Work on improving customer service and make sure to pay suppliers consistently.

4. Get tough with deadbeats

This is no time to play Mr. Nice Guy when it comes to collections. Entrepreneurs need to be conscientious in pursuing late bills. Customers have to pay or else you're just financing their business.

5. Focus on inventory management and product offerings

If sales are down and inventory turnover is slowing, you have to be aggressive in clearing out stock. While you're at it, analyze your product lines to see what's selling and what's just taking up space. Look to your sales force to help you reduce inventory and weed out unprofitable product lines.

6. Use debt to protect your working capital

It's important to avoid paying up front for long-term investments, such as equipment purchases or a building expansion; that will just tie up working capital. You're better off using debt to finance these projects. Also, consider refinancing fixed assets to free up capital.

7. Cut waste and streamline operations

Boost your company's productivity and profitability by eliminating bottlenecks, overproduction, inefficient equipment and other sources of waste. Employees are your best source of ideas, so get them involved.


Source: Business Development Bank

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