Cash flow is one of the most critical components of success for a small or mid-sized business. Many a profitable business on paper has ended up in bankruptcy because the amount of cash coming in doesn’t compare with the amount of cash going out. Most business owners don’t truly have a handle on their cash flow.
- Collect receivables – Speed up the receipts and processing of receivables by requesting customers for electronic funds transfer. If they plan to pay by check, ask customers to preauthorize checks so that banks can draw against their accounts at timed intervals. You can also try offering discounts to customers if they pay bills quickly.
- Tighten customers’ credit requirements – Businesses often have to extend credit to customers, particularly when starting out or growing. But you have to do your research beforehand to determine the risk of extending credit to each customer. You should do a research and check reports on health of individual customer’s business and whether or not they are having cash flow problems.
- Increase your sales – If you need more cash, it seems like a no brainer to go out and try to attract new customers or sell additional goods or services to your existing customers. Selling more to existing customers is cheaper and you may be able to do this by analysing what they’re buying and why – information that may even lead you to increase your profit margin and, hopefully, generate more cash.
- Offer discounts – One option to increasing cash flow is to offer your customers discounts if they pay early. While this practice may impact your profit margin, it may help your management of cash flow by offering incentives to customers to make payments earlier than billing cycles typically require.
- Secure loans – Short-term cash flow problems may sometimes necessitate a business taking out a loan from a financial institution. Some possible types are credit lines or equity loans. Most of the time this type of borrowing accomplishes its goals, although during the financial crisis banks may cancel credit lines.
- Measure cash flow frequently – Ask yourself two questions to get a sense about whether your cash flow is under control or not – “What is my cash balance right now?” and “What do I expect my cash balance to be six months from now?”
- Prepare backup plan – No matter how much effort you put into perfecting your forecast, unexpected obstacles can throw your plans out the window. For this reason, you need to have a contingency plan for when money is tight to ensure your business is kept running.
- Don’t under-price your product/service – It can be tempting to lower your prices in order to offer your clients the best deal and stay competitive. Be careful not to under-price your products or services though. Make sure you are bringing in a healthy profit margin.
Cash flow is important for all businesses, but it is critical for start-ups. If you cannot manage your cash flow within the first year, you will likely not survive the second year. Register for free at TheGongzuo.com to stay afloat with the help of our investors and financial advisors. Our experts will guide you shape your actions going forward.