Two of the major failure points for small businesses are 1) insufficient cash to pay the bills because of poor sales, and 2) destruction of working capital from unmanaged growth. Don’t kill your dream because the cash box is empty. Managing cash flow is an essential competency of any successful owner. Cash-on-hand is the lifeblood of a business regardless of whether it is from sales margin, retained earnings or credit.
Here are three key areas to focus on in order to keep that cash box full.
Inventory is cash collecting dust. Whether you paid cash upfront or on credit, all inventory needs to be viewed as unavailable cash. Once it is sitting on a shelf gathering dust, it only provides value after production, billing and payment received. The less inventory you hold, the better your cash position. Ensure you understand minimum replacement levels to prevent work stoppages.
When you buy raw materials, the clock starts ticking. The goal is to base inventory purchases and levels on the JIT (Just In Time) demands of customers.
- Base purchases on demand, not on a historical schedule. In other words never order raw materials until a purchase order is prepared on a closed deal.
- Increase your “turns” immediately. Make it a high priority to double the number of times you turn over inventory per year.
- Order in the smallest lots possible (without sacrificing discounts) and supply your projects with multiple deliveries per week.
Pay suppliers at either the last possible moment, or immediately. Keep you cash velocity positive by negotiating smart terms with your suppliers. Start with gaining quick-pay discounts with two objectives: the largest discount for the longest period. An example would be a 10% discount for payment within 10 business days instead of 10% for 5 business days. If the supplier doesn’t offer good discounts, push payments as far out as possible without penalty, such as 45 days instead of 30.
Using commercial credit often requires a complex balancing act. In commercial credit, you don’t get full credit for paying on time – you maximize credit by paying before the due date. So keep that in mind.
Money owed over 30 days is really a loan. View your accounting department as a source of cash. The quicker you are paid by customers, the less cash you need to hold on hand and/or the less credit you need to use. Establish a process where your staff are on a first-name basis with customers, and where staff have several conversations with customers before the payment due date.
You are not a bank. When customers don’t pay within the agreed terms (usually 30 days), you are loaning them money. That has to stop, and here are some things you can do:
- Invoice Accuracy – inaccurate invoices provide the customer a legitimate reason to avoid payment
- Invoice Follow-up – establish a follow-up date (5 days after mailing / emailing) to call customers and review the invoice to ensure accuracy and that there are no obstacles to on-time payment
- Factoring Your “Loans” – based on historical records, if you have any customers that are habitually late over 45 days, consider selling their accounts receivable (AR) to a factoring company and receive 93% of the total within 24 hours.
You cannot survive and grow without cash on hand. Most small businesses are losing 15% of their available cash because of inadequate attention and management. Get cash-flow-positive by reducing inventory, negotiating better terms with fewer suppliers, and bringing accounts receivable under 30 days.
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