Cash is the life blood of business. Strong cash flow is essential for small businesses to stay open for business. Companies go out of business because of poor cash flow strategies, and experience fast growth if their cash inflows surpass their cash outflows. Small Business Owners must therefore continually search for ways to improve the cash flow of their businesses.
Here are some of the strategies a Small Business Owner can use to improve the cash flow of a business, and ensure that the business avoids, or survives, negative cash flows:
1. Promoting Cash Sales: Cash is king when it comes to keeping a business running. While customers usually prefer buying on credit rather than with cash, there are ways to drive more cash sales and make cash sales more desirable by customers. One of such strategies is to offer customers incentives for paying cash. For example, the business can offer a discount on cash purchases. The business can also offer small gifts for cash sales.
A key advantage in selling goods and services in cash, rather than on credit, is that it makes additional capital available for the business and eliminates the pressure that credit sales exert on the cash flow of the business.
2. Diversifying Sources Of Supplies: Diversifying sources of supply is one of the best kept secrets in managing procurements. Businesses that work with a diverse base of supplier are more likely to have lower overall operating costs.
A business does not need to use the same suppliers at all times. Working with a large database of suppliers gives a business the opportunity to engage several suppliers, which can deliver lower costs of procuring inputs, and a lowering of the cost of producing and delivering the products and services of the business.
Multiple sources of supplies also allow the business to pick and choose from the range and prices of supplies on offer from several suppliers. As each supplier is looking to make concessions in order to win the business, the competition between and among the suppliers tilts the bargaining power in favour of the business.
3. Liquidating Under-Performing Assets: A business that is experiencing a cash crunch can consider selling such assets as vehicles, machinery, inventory, etc. that are not producing cash for the business.
This means selling assets that can be converted into cash, like items that the business has not used in the past six months to one year. The income that accrues from these sales can then be used to boost the working capital of the business.
4. Intensifying Sales and Marketing Drive: The more people know the business, the better its chances of making more sales and more profits. An increase in marketing and sales efforts are two useful ways for improving the income-producing capacity of the business.
The Small Business Owner must understand that the business needs marketing and sales to drive revenue, and must resist the temptation of taking the narrow view that marketing is not a revenue centre. Marketing is at once a cost and a revenue centre, and must work closely with sales to drive revenue, especially at times when sales are slow and cash flow is weak.
Marketing and sales must align directly on the income objectives and priorities of the business. They must jointly develop and implement plans for creating revenue streams for the business.
5. Fast Tracking Collection Of Accounts Receivables: Having money with customers, and not collecting them, is a crucial cause of shortage of working capital in a business. A business must move fast on past-due receivables, and ensure on-time payments regarding deadlines, amounts owed and payment methods.
Cash flow issues arising from poor accounts receivable management can lead to failure of the business. Every business must formalise a process for collecting its accounts receivable. It must have a plan for spotting potential cash flow issues. It must address them before they compromise the health of the business.
The Small Business Owner must know the current payment status of all accounts receivable. He or she must be on top of the accounts receivable report that tracks and measures the payment status of every customer, and serves as an important tool for managing the finances of the business.
A low turnover in accounts receivables calls for the setting up of a crack team to embark on a debt recovery drive. Team members can be encouraged with rewards for any money they recover.
Another way to help bring in the cash is to give discounts for early payments, and offer payment plans for debtors having cash flow challenges.
6. Extending Time For Settlement Of Accounts Payables: In striving to generate positive cash flows, Small Business Owners primarily focus on the money that comes into the business through accounts receivables. However, Small Business Owners can also apply accounts payable strategies which aim to slow the flow of cash out of the business.
One of such ways of freeing cash to run the business is to negotiate with suppliers to extend payment terms on the company’s accounts payables. For example, if the business is already enjoying 30 days grace on its payables, it can ask for 45 or 60 days. This can be done by agreeing different grace periods with different suppliers.
The bottom line is that the longer the business holds on to its money, the better for its cash flow.
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