During the 1992 presidential election, there was a sign that was reportedly hung by James Carville, Bill Clinton’s campaign manager in their Little Rock Office that simple stated “It’s the economy, stupid.” This was a reminder to everyone that worked there that the only thing that the national race was about was the economy.
That year, I started my third business after failing in two others. This time, I made my own sign and tacked it up in my office. It read, “It’s cash flow, stupid.” It became my daily reminder and mantra. Starting out in my first business in 1980’s, I thought that the only thing that mattered was to sell my product to whoever would buy it. I reasoned that if you make sales, you eventually make money.
This worked great until customers didn’t pay me on time or at the same rate as my business expenses grew. Unfortunately, even if my customers did not pay their bills when they were due, my employees and vendors still wanted to get paid on time. What I realized is that sales do not pay bills, cash does.
Collecting the cash from sales means everything. It is the gasoline that makes your business engine work. Without cash, your business literally suffocates. Most businesses fail because they run out of cash leaked through losses or other poor management practices.
How to Improve Your Cash Flow
Open the Bank Monthly Statements
Check to see if you have more or less cash when comparing the beginning month and end of month balances. If the end of the month cash balance is higher, the company is cash flow positive. If the end of month balance is lower than at the beginning of the month, the company is cash flow negative.
Learn to Read the Cash Flow Statements
Don’t outsource the math. By definition, cash flow is typically your monthly profit, plus the change in accounts payable, the change in accounts receivable, and the change in inventory. The higher this number is monthly, the healthier your company will be.
Collect Account Receivables Faster
The sooner a customer pays, the higher the cash flow. The Days Sales Outstanding (DSO) for your business should never be more than 133% of your invoice terms. Don’t extend credit to a customer that has not proven they can pay in a timely fashion. Remember that credit is a privilege, not a right. Better yet, get your customers to pay with a credit card or prepay for your services.
Get Longer Terms From Vendors
Extended credit from your vendors will boost your cash. Always pay within the agreed period of time. However, if you have 30 day terms, try to get 45 days by building up a reliable track record.
Sell Inventory Faster and Keep Inventory Levels Lower
Buying inventory only to sit for months on your shelf waiting for customer orders can take a lot of cash out of the business. Track your inventory carefully. Know what sells quickly and what never moves off the shelf. Know how long your customers will wait for a product and still be satisfied. This will determine the setting of reorder points (when a product is reordered to be put into inventory) and the reorder quantities (how much is reordered).
What have you done in your business to improve your cash flow?
This article, provided by Nextiva, is republished through a content distribution agreement. The original can be found here.
Cash Photo via Shutterstock
ed pierce
I have found that that really is the best way to find extra money. Taking a look at your financials can really make you think about what you are spending for this or that and how you can make changes that have a positive impact on your bottom line.
I find it curious that one point is to collect AR more quickly and the next point says to get longer terms from vendors. What if I’m the vendor that company A is dragging out to keep their cash flow situation cozy? These two points seem to create a Win-Lose situation.
Barry Moltz
No, its win win- you earn longer A/P terms and then pay when promised. There is nothing wrong with not giving your customer long terms. The difference between these two are key!
Aira Bongco
The most surprising tip here for me is to get longer terms. If you compute it, you will get to save some money with a shorter term. But I guess it will work since we are talking about a business that has growing money overtime.
Barry,
Great tips. I’d like to focus on the need to learn how to read your cash flow statements. IMO, we MUST understand the numbers – no excuses – because what you read is what you often can’t see while busy running your business.
Wonderful tips shared to grow our business in a better manner, also keeping the profit margin on a higher side. We all know who are those customer who makes the payment late or so. I believe that understanding of each & every valid point is important for running a business in full cooperation with the employees.
To keep track of my finances, I always check on my internet banking statements online and tabulate the data in an Excel sheet. This way, I know if it is positive or negative balance at the end of the month.
I can’t disagree with anything said here, but I would like to add most basic accounting software will track positive cash positions automatically along with A/R A/P and most meaningful financial aspects of your business. It sames many hours of work and time really is money.
Barry Moltz
Agreed, but so many small biz owners fear the cash flow statement!
Good advice. Businesses can also utilize Barter…whether direct swap or through a Modern Barter exchange to preserve cash flow.
With direct swap barter, one has a guaranteed sale. And, the expense did not require cash, except for any specific cash cost of sale which is well offset by the cash not spent on a purchase. Through a Modern Barter Exchange transaction, some of the cash expenses are gone. The cash that would have been needed to pay a vendor is retained to pay other vendors or in areas that grow more sales.
Barter is a tool to use in business transactions. It is easy once one knows how to use without causing issues or IRS concerns. Cash will remain king, and using barter frees up more of the king’s gold.
Jeff Weaver