Knowing the financial aspects of running your small business is as important as knowing about the product or service you are selling. For starters, this means tracking the movement of cash in and out of your business.
Having enough cash to cover the bills is critical for the survival and success of any business, and it is especially important for small business owners. When you have enough cash on hand, you can hire more, produce more, pay less for supplies, and take advantage of opportunities to grow your business.
Summit Financial Resources sees cash flow as the lifeblood of any small business. Inspired by tomorrow’s celebration of Cinco de Mayo, here are five tips for beefing up your company’s cash flow strategy.
1 – Manage Your Inventory
Goods that aren’t moving off the shelves are tying up a lot of your cash. Evaluate what you currently have on hand and be objective. If you have too much cash tied up in products that only sell sporadically or have excess inventory that has become obsolete due to a shift in customer demand, unload it. Even if you sell it at a discount, you’ll be able to use that cash to purchase items that you know will turn over more quickly.
Avoid buying inventory simply to stock the shelves for future orders or purchasing a product in hopes that one day your customers may want it. It may end up taking a very long time to turn these goods back into cash.
2 – Increase Your Prices
As obvious as this strategy appears, it is often the most difficult step for small business owners to take. They typically worry that higher prices will scare off customers and result in lost sales. While this is always a possibility, there is no way to truly know without testing the waters to see what the market will bear.
Keep in mind that increasing the price of your products may also increase their perceived value, which could attract new customers. If your prices are too affordable, potential customers may have a negative perception of your quality relative to your competitors. The key is to find a price point that helps boost your cash flow without reducing sales.
3 – Examine Your Terms
If you’re having trouble with cash flow, take a hard look at the terms you’re offering to customers and how your customers are performing to those terms. Once you’ve pinpointed the trouble spots, consider implementing the following changes:
- Don’t offer extended terms: You want to get paid as quickly as possible, so avoid agreeing to extended payment schedules. This can be difficult to negotiate, especially with large companies that dictate their terms. However, if the impact on your cash flow will put your business in jeopardy, you need to seriously consider if getting their business is worth it. If it is, invest the time in finding a solution that works for both of you.
- Offer early pay discounts: Give customers a discount for paying their bills ahead of time. For example, if normal payment terms allow a 30-day period for remittance, offer a percentage discount if the invoice is paid within the first 10 days. This provides an incentive for customers to pay early and help you collect the cash you are owed.
- Create penalties for late payments: Add interest to any invoice that has gone unpaid for too long. This can be beneficial if you find it difficult to follow up consistently with customers when they are late in paying.
As a best practice, send out invoices immediately following a transaction. Customers may be late in paying, but if you are slow to send the bill, it can put you further behind on collecting receivables.
4 – Negotiate Vendor Payments
Slowing the outflow of cash is an important aspect of any money management strategy, one that relies on maintaining both solid vendor relationships and a good credit rating. Staying on friendly terms with your most strategic suppliers will make it easier to negotiate better terms and discounts. It is also critical that you strictly manage delayed payments to avoid late fees and any damage this can cause to your credit.
Check to see how your suppliers’ terms compare to others in the marketplace. Ask your vendors to offer longer terms on inventory purchases to give you more time to pay invoices. For example, a 30-day delay will allow you to keep that cash and use it to cover other expenses, as well as give you a month’s head start in managing your cash flow.
5 – Get Financing
It’s not unusual for companies to run into unexpected situations where they suddenly have too little cash on hand. This can happen no matter what the industry or how healthy the business.
Working capital financing is vital for small business owners, but too often they find it difficult to get the cash they need to cover day-to-day operations, purchase inventory or equipment, and pay their employees. Summit Financial Resources offers working capital loans that involve using your accounts receivable and other assets as collateral. We can mix and match from a variety of product options to suit your needs, including invoice factoring, asset-based lending, inventory lending, and equipment financing.
Because Summit Financial Resources is not regulated like a bank, we can structure more flexible deals, take more risks, and make funding decisions quickly. We partner with our clients to reach their business goals, creating custom financing solutions with reasonable rates and structures that banks and other commercial finance sources cannot provide.
Optimizing your cash flow involves a strategy that balances increasing revenue, cutting costs, and speeding up invoice payments. For those times when cash is tight, we can help you get what you need to keep your business running smoothly.
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Summit Financial Resources specializes in working capital financing for small to medium-sized businesses that need increased cash flow. We provide working capital financing through invoice factoring, asset-based lending, inventory lending, and equipment financing.