Sir Richard Branson described cash flow with the perfect metaphor, calling it “the lifeblood of business.” If we want to look at a business as a human body, it’s important to make sure that the cash flow regulates continuously and without fail. We must consider outside influences and track the inner workings of the system, since we’re aiming for good health and a long life — or, in business terms, profit and longevity. First and foremost, you need to track the net amount of cash (or cash equivalent) going in and out of your business. This means keeping your books organized, accurate, and up to date. There’s plenty of software available to simplify and monitor funds, payments, and exchanges of goods. The rest of the details on how to properly manage your cash flow are a bit trickier, but you’ll need to keep these things in mind for the health of your business.
Track Inventory
Anyone familiar with the hit television show Kitchen Nightmares knows that in every episode there comes a point in which cantankerous chef Gordon Ramsay examines the participating restaurant’s inventory. Whenever he comes to the refrigerator unit, he almost always finds a surplus of expired and rotten food, leading him to berate management and the kitchen staff.
As a small to medium-sized business owner, imagine Chef Ramsay stalking your hallways, ready to burst into an expletive-laden rant whenever he comes across stock or items that don’t belong. Be sure to take regular inventory checks to see which goods are stagnating and taking up valuable space – and tying up your cash.
The First In, First Out (FIFO) approach is a commonly known but often overlooked method of ensuring that your goods are sold in the same order they were purchased or made. Identify low-turn stock that hasn’t moved in the last few months. The first thing you should do is stop ordering or producing the item. Afterwards, you’ll need to find a way to move that inventory while incurring minimal loss. That means a promotion or discount on these unsold items.
Inventory management software can help track stock in real-time, prevent production shortages, and forecast demand. And while you can use the software to audit yourself, your inventory will still have to be counted by you or your staff to prevent discrepancies.
Frugality is the Trick
The goal of saving money isn’t to simply hoard your riches. If done carefully, you’ll mitigate many of your expected costs while being able to reinvest in your own company. As an example, consider leasing equipment instead of buying it. Whether a car, a computer, or office equipment, leasing frees up your cash while allowing you to expense the lease costs on your business taxes.
“the lifeblood of business”
For those accustomed to a more traditional style of saving money: carry on. Building up a cash reserve is necessary to maintain a healthy cash flow. It’s good to have money on hand in case of emergencies or short-term investments. It’s not only for potential disasters your company might encounter, but also for the ability to pull the trigger on quick purchases that could save you money in the long run. Keep an eye on essential equipment and machinery that could potentially break down. Take preventative steps to ensure that everything runs as it should to cut down on potentially lengthy and costly repairs. You should also know the expected life cycles of your most important equipment to stay ahead of sudden expenses.
Dealing with Customers and Clients
Putting on a friendly face can only go so far. While it’s important to establish a friendly rapport, it’s your cash flow that you’ve got to focus on. Find ways to earn more money while incentivizing your clients. For example, you can offer discounts to those who pay ahead of time; this both helps your cash flow and creates the urgency for your client to settle up with you early.
Setting up mobile payment options can also get the cash flowing sooner than later, since it’s just a matter of using a smartphone. It makes things easier, and gives your customer a feeling of assurance and power in the transaction.
As important as it is for your business to prioritize your clients’ service, sometimes you need to set guidelines that work best for your cash flow, starting with credit checks. You can preserve your cash flow by running checks on clients and avoiding instances where you would more than likely receive late payments. While sales are obviously important, going into business with someone who has bad credit is a big risk, which is why you may want to consider bumping up the interest rate.
Make More Money
If only it were as simple as it sounds. Increasing your cash flow should be the first and final goal of your business, and while it sounds like a naïve suggestion, you should take it as a hint to try new business tactics to expand your market.
For starters, you can simply increase your prices. Suppress the fear of driving your customers away and try to experiment with your pricing. You’ll find out exactly what your customers are willing – or unwilling – to pay.
Alternatively, you could add something new. Whether it’s a new product or service, loyal consumers are more receptive and willing to hear your pitch. Use your creativity to market your business and your offerings. An outside-the-box marketing strategy may very well pay off. Try catering to a new audience or a demographic you never considered before. For example, your coffee shop may have a regular clientele of coffee aficionados, but you could also attract socially conscious customers by offering fair-trade coffee beans, or lure diet-conscious consumers in with vegan or ketogenic products.
Brainstorm new ways to present your business. If you only exist as an online retailer, consider a brick-and-mortar location (or a pop-up store), and vice versa. Being creative is the best way to open up opportunities that will improve your cashflow.
Alex Correa | Contributing Writer
