Most small to medium-sized businesses experience cash flow problems from time to time. Start-ups are particularly vulnerable.
The nature of some businesses often dictates cash flow cycles, so it’s necessary to manage cash gap realities.
Without exception, people who encounter cash flow issues are also experiencing worry and stress. It’s critical to act quickly.
So what can you do to compress this gap in order to keep your business solvent?
Meet with your small business or commercial bank representative to discuss your issues. Determine if a consolidation loan is an option.
Banks want you to be successful. The banks that I work with may even recommend the services/products of other institutions to help you solve immediate issues when they can’t.
A recent ActionCoach newsletter article offered several suggestions that address an urgent situation, and will improve business practices overall.
• Review your receivables. Start by calling any that are over 60 days to prompt them to pay immediately. Take a credit card for a portion and negotiate dates for payment in full.
• always advise clients to categorize customers into A, B, C and D clients. There are always concerns that ridding your business of the D clients is risky; the truth is that D clients directly contribute to your cash gap situation.
• If the situation is dire, negotiate with your suppliers. If your business has a good record, it may be possible to arrange payments over extended periods.
• Focus immediately on strategies that generate sales, such as organizing a sale to move slow-moving or older stock.
• Evaluate packages or bundles where you can up-sell or cross-sell. These strategies will only succeed when you focus on customers’ needs rather than simply pushing more products and services.
• Sell unwanted or unneeded assets. Sometimes, an older truck or piece of equipment can cost you more to maintain than leasing something new.
• Increase prices. This is often the most difficult things for an owner to do, yet it’s rare that customers complain when prices are increased. The prices will significantly increase cash flow and the bottom line.
Just to give you an example, if you have a margin of 30 per cent and you raise your prices 10 per cent, you can loose 25 per cent of your business and still make the same profit. Email me if you want to see the math.
• Consider factoring as an option. This is where another company buys your receivables at a discount. Some companies that offer advanced factoring pay you (at a discount) within days for an invoice you issue to, for instance, ABC Company. ABC Company would then pay the factoring company.
Some will advance you money based on your income history from credit cards. They will then take a percentage of each transaction as payments towards retiring the loan.
These strategies can be very expensive, but worth considering in order to solve short term issues.
• Review your cash flow situation weekly so you can forecast potential problems and take steps to remedy them. If unpaid purchases are greater that total sales due, you know that a potential cash flow problem may exist.
• No matter how many team members you have, explain the situation and have them brainstorm suggestions to increase productivity and reduce expenses. Train your sales team on the impact conversion rates have on business.
• Look for ways to increase average dollar sales and set targets. Set short-term (90-day) sales goals and get buy-in from the whole team.
• Calculate gross profit margin on everything you sell and then focus on selling the items that are bringing in the most total profit.
• Monitor your customers’ use of credit and adjust their credit limits accordingly.
• Review the processes that ensure you are getting invoices out promptly. Without exception, preparing invoices daily or weekly, instead of monthly, will tighten turnaround by 30 days.
• Offer your customers a discount for paying their invoices early. Most businesses are looking to save these days, so a two per cent discount for early payment may not seem like much, but may translate into significant results.
• If you operate a service business — such as website or software development, home repair or landscaping — establish a payment schedule before the works begins. This policy should include an up-front payment as well as progress payments. The final payment should be payable upon completion and sign-off of the work.
• Calculate breakeven points for business and all sales people. If you don’t know how to do this, talk to your accountant or email me.
• If appropriate, move people from salaries to performance-based pay. People simply perform better when all or part of their income is performance-based.
Just remember, you are not the first person to experience tight cash flow and you definitely will not be the last. Financial advice author and speaker Robert Kiyosaki wrote, “Cash flow management is an essential life skill and a skill that will require more and more sophistication as we move further into the information age.”
ActionCoach is written by John MacKenzie of ActionCoach, which helps small- to medium-sized businesses and other organizations. He can be contacted at johnmackenzie@actioncoach.com or by phone at 403-340-0880.