If you own a business, you know this is true. I knew it was true – however when taking over my first 2, I thought I had cashflow under control and then when cash got a bit tight had to get more creative. Don’t wait until you’re in a pinch! Here are a few ideas on how to make sure you have a great plan for maintaining cashflow.
- Manage your receivables well – If you don’t have receivables and don’t believe in them, Wells Fargo makes an interesting mathematical justification for them here. If you do have receivables try some of these things:
- Have procedures in place to avoid billing errors. – Very simply, make sure you print out as many bills as you have customers with balances. Any billing program should be able to verify that.
- Implement Finance Charges AND Late Charges – Whether your credit card has a balance of $100 or $10,000 you always get hit up for at least a $35 late charge. Why should your bills be any different?
- Stay on top of past dues – Whether by faxing, mailing, emailing or calling, people know which companies they should pay first and which they should pay last. Part of that is based on your late/finance charges and part is based on how much you’re going to nag them.
- Offer reasonable terms – If you give someone 60 days to pay, you could run into some very tight cashflow periods. Thirty days or less is usually acceptable to most people.
- Have credit available – We all run into tight times whether its for a day or a month. Make sure your business is credit worthy and then work on the following:
- Vendor Accounts – Just like you extend credit to your customers find other businesses who will do the same for you. Just beware that their products are more expensive because of that.
- Credit Cards – A quick way to give yourself an additional 30-60 days to come up with money for a payment. If you always pay off your credit card and/or know how to use cards with 0% interest this can be very helpful. If you are not good at managing money, then you probably want to avoid credit cards.
- Business Lines of credit – If you have a strong relationship with your bank and have decent personal credit, get started with one of these even if you don’t need it right now. Use it occasionally to build up a credit history with your bank so that when you need cash for a tight time or to expand you know it’ll be there.
- Savings – Create an interest bearing savings account for your business. Take a percentage of every sale and put it into that account.
- Personal Loans – If you have the ability personally to loan your business money that can be advantageous for a few reasons. You can charge a transaction fee and interest and make some passive income for yourself minimizing tax consequences (always check with your accountant first).
- Other lenders – Having access to the cash you need when you need it is important. It’s also important to have business credit separate from personal credit. With that in mind, I started working with BCS Credit services to help me achieve both. I’ve been working with the company for over 2 months and to date I would definitely NOT recommend them. The theory of what they provide is good and they have some great ideas, but so far they’re not delivering on their promises. We’ll see ultimately how it works out.
- Supplier financing – Car dealers do not buy cars and then sell them to you. They finance them and then pay a monthly payment to keep them on their lots until you or I buy them. Motorcycles, ATV’s, jet-skis, snowmobiles all work the same way. There are a lot of businesses where your primary supplier will allow you to either pay for something up front OR they’ll finance the purchase of that item for you. Make sure you see if your primary suppliers can do that for you.
- Pay vendors early – This past week I finally made the time to review our payment policies in detail. Several of our top vendors offer anywhere from 1% to 5% discounts for paying early or on time! In my business that equates to about $330/month in savings. How much money could that save at your business? My Quickbooks is setup to tell me exactly who I can pay early and what discount I can take on that payment so it saves me a lot of time and effort to track.
- Maintain “adequate” inventory – Since my background is in Mechanical Engineering and particularly in the auto industry I’m somewhat familiar with Just-In-Time (JIT) inventory management. With the cheap shipping rates and quick service of UPS and FedEx, if you stay on top of your inventory it’s not hard to always only keep enough on hand for a few weeks at a time instead of a few months. When you buy a business that has months and months of inventory on hand, you can quickly free up some cash by just slowing down your orders of new parts until current inventories are at the minimum level and then only ordering what you need. Obviously you need to take into account shipping costs compared to the late fees you’ll be charged if you don’t have the cash to cover all the extra inventory you just ordered. Like most things these days, the proper inventory management software can make this process a whole lot easier. 🙂
Make sure you don’t use business credit cards and accounts for personal items! Credit is nice to have and can be helpful personally, but if you do that, chances are a court of law would view no separation between your business and your personal assets. In other words, if the business is sued, and you mix and mesh your business and personal credit cards and charge accounts, then the court may find that you’re also personally liable since there’s no difference between your personal money and your business money. Then they come after your house, car, pension, IRA’s etc. Don’t make that mistake. It’s not a gamble worth taking.
Do you have any other creative methods for ensuring Cashflow is King? Looking back, it’s odd that I waited 6 months to write this blog since it’s so crucial to business success. In my next business, this will end up being one of my first areas to improve. Don’t make the same mistake I made and wait until your forced to review all of these things!
To your success, Bryan