Want to sleep better at night? Use these tactics to tune up your cash flow.
In the business world, cash is king. You may anticipate large profits in the next six months, but if you don’t have enough cash coming in to cover your expenses during that time, you may not get a chance to realize those earnings.
Understand major cash flow influencers
Start by understanding what influences business cash flow to see if there are strategies you can embrace.
- Sales volume. Look for ways to increase the size of each customer transaction. Called a volume strategy, it can be done by suggesting add-ons that complement a purchase. Automobile dealers, for example, are experts at selling items such as audio systems, trim packages and extended warranties to complement a new vehicle purchase.
- Business expenses. Lean and mean is the order of the day, so put all of your expenses under a microscope to identify possible savings in payroll and operating expenses. Call each vendor and ask for their suggestions to save you money.
- Payment terms. Can you collect your money any faster? Can you delay outgoing cash? Try to do both. Collecting all of your sales dollars upfront is ideal. Airlines, insurers and Internet retailers charge in advance. Why can’t you? Consider revising your payment policy to collect all of your fees upon commitment.
- Market conditions. While you can’t control the economy, you can change your response to it. Consider selling someplace else. Business may be slow in your usual marketplace but it might be booming elsewhere. While you’re at it, update your business plan to identify fresh strategies to achieve your goals.
These influences make it important for all businesses to develop the right strategies to maintain a healthy cash flow. The following tips can help.
Speed up receipt of cash
Any steps you can take to shorten your receivables will boost your cash flow. For instance, send out invoices immediately after the delivery of goods or services. Another idea is to change your payment terms — for example, from 60 days to 30 days.
Offer a small discount to customers who pay their bills early and charge a penalty to those who pay late. Monitor your receivables on a weekly or bi-weekly basis and follow-up with late payers when appropriate.
- Financial tip: Offer credit carefully. Do a financial check on new customers before offering them credit. Contact credit reporting services such as Equifax and Dun & Bradstreet.
Use your business credit card
Consider using your business credit card to pay suppliers and make purchases. Learn about your card’s grace period, and take advantage of it — you may have up to 25 days after receiving your statement to make the payment.
Some cards also come with cash-back features. Speak to a Scotiabank Small Business Advisor about the card that’s right for you.
Encourage use of payment cards
Depending on the nature of your business, you may want to consider accepting credit card and debit card payments. This allows you to receive next-day value for your sales and services, without the need to handle cheques and make deposits.
Whether you serve customers over the counter or online, a merchant services solution makes it easy to process payment cards.
Analyze your cash flow
Many businesses go through cyclical highs and lows. Retailers, for example, typically have their best months in December and January, while contractors do well in the spring and summer.
A cash-flow analysis can highlight the cycles in your business. This information can be used in many ways, such as timing your borrowing, arranging the right amount of staffing, and boosting your marketing efforts during lulls.
A positive cash flow, however, isn't only about keeping money flowing in. It's equally as important to prevent it from seeping out. Shortening your employees' workweek to four days, for example, can help you cut costs without impacting workforce morale. Just be sure you provide your workers with advance notice of any scheduling changes.
Work with an accountant
The services of an accountant can serve as an investment rather than an expense. An accountant can review cash-flow projections and results, provide insights into areas that you may have overlooked, and help you anticipate and plan for cash-flow problems.
Get a line of credit
Having a line of credit in place to cover short-term needs and emergencies is a much more efficient way to manage your cash flow than trying to get a loan in a hurry. Rates are competitive, you can draw from your line of credit when you need it, and you pay interest on the amount borrowed. Arrange for a line of credit before you fall short.
Put your cash to work
A high-interest savings account for business allows you to earn a competitive rate of interest on your cash on hand, but the funds are accessible whenever you need them. You earn interest every day on each dollar saved, and can withdraw the money whenever you need to.
Lease instead of buy
Consider leasing a piece of equipment, car, or computer system instead of buying it outright or taking out a loan. You’ll free up some cash that can be used to tide the business over when cash flow is tight.
Consider ‘continuity’ sales
Another way to improve your cash flow is by offering deals on your products or services to customers who buy for a fixed period of time. A subscription-based product such as a newsletter or magazine is a good example of how continuity sales work: you pay the publisher upfront for a one-year or two-year subscription; in return, you get a better deal on the cost of the newsletter.
Offset slow seasons
It's always a good idea to plan ahead. If you know that your business is heading for a slowdown, why not offer customers a 5% discount if they're willing to hold off on a non-critical job until the winter? By doing this, you're essentially pushing payments into the slower months without losing business.
Continuity sales can be made to work for almost anything. Your customers save money on a package of goods or services, and you get the cash up front.
Invest in your business
Any steps you can take to build your business, such as training staff or boosting your marketing, can help improve cash flow.
- Use our Scotiabank Compass for business to identify the 7 key actions you can take to plan your business successfully.
- Find out about some special programs and offers tailored to small businesses like yours.
- Learn about Scotiabank's competitive business credit card solutions that are adaptive to your business needs.
- Talk to a local Scotiabank Small Business Advisor about help and assistance available for your business.
Article originally featured on the website: Get Growing for Business. Find additional information and tools relevant to your business.