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