As business owners find themselves operating under new economic conditions, their philosophies regarding cash may not change – after all, cash is still king – but learning how to manage and improve cash flow in this new environment will likely require some changes to the way things have always been done. Below are eight tips that business owners can use to improve cash flow, even when there is a cash crunch.
1. Measure Cash Flow
As with any metric, you cannot control what you don’t measure. Measuring cash flows will look different for each company. Many can repurpose the data already being reported on their income statements, but others may need to create standalone cash flow statements to review. To learn more about how to measure cash flows and how to use those measurements, check out the previous article in our cash flow series here.
2. Cut Expenses
Once you’ve begun tracking cash flows into and out of your business, you can more closely monitor expenditures. With your cash outflow information, you can:
- Compare target or expected cash outflows to actual expenses to find outliers
- Compare actual expenses to prior periods to see what changed
3. Think Lean
Keep your operations as lean as possible. If your money is tied up in inventory, you cannot use it to pay down debt, invest or meet your everyday cash needs. Similarly, you don’t want your money to be tied up in unbilled revenues. Bill regularly for your work in process and get paid sooner for the work you’ve done.
4. Plan Purchases
Budget for and plan your purchases throughout the year. If you proactively upgrade or replace your equipment, you will ease the strain on your cash reserves and reduce the likelihood you’ll lose revenues if your equipment fails.
By looking at your budget, you can also determine whether it is advantageous to purchase equipment outright or lease it. Leasing equipment or vehicles can be an easy way to reduce upfront costs, which may be essential if you are experiencing decreased revenues and your cash reserves are dwindling.
5. Control Personnel Costs
In some industries, personnel costs comprise a good portion of the business’s overall budget. You can improve cash flow and reduce these costs by:
- Hiring independent contractors. Some independent contractors have high hourly charge rates, but in return for those extra costs you will not have to pay payroll taxes on the amounts you pay them, nor will you have to pay for their equipment, overhead, insurance, or sick leave.
- Cross-training employees. If your key employees get sick, who will take over their jobs until they are well again? Cross-training employees can keep your business up and running.
- Outsourcing when necessary. Certain functions can be outsourced to save the company the cost of full-time employment. Frequently outsourced business functions are accounting and bookkeeping, CFO services, human resources, marketing, information technology, customer support, web design, and legal services.
6. Create New Billing Processes
Create protocols that you and your employees follow to shorten the billing cycle. This may include automating invoicing, approving invoices more regularly, sending invoices sooner, tracking and following up on unpaid invoices regularly, depositing checks promptly, accepting different methods of payment, and incentivizing early payment.
7. Rethink pricing
When was the last time you reviewed your service rates or product costs? If you look at industry benchmarks, are you in line with those prices? Cost increases can be one of the simplest ways to increase revenues from your current customer base and improve cash flow. It can be tricky to manage well, but customers who value your product or service will be happy to pay you at market rates.
8. Negotiate costs
Very few costs are set in stone, but they won’t change unless you ask for them to change.
- Talk to your suppliers. Simply asking for a discount may work, but if not, you may be able to negotiate a discount in exchange for purchasing terms your supplier deems more favorable. If they aren’t willing to reduce costs for you alone, you can also consider forming a buying cooperative with your competitors.
- Talk to your bank. If you’re unhappy with your bank’s fee structure, they may be able to offer you a different package that works better with your business. You can also talk to your banker about refinancing (to take advantage of lower interest rates) or increasing your line of credit (to have better cash availability).
- Talk to your lessor. Talk to your lessor about different leasing options. You may be able to sign a new lease that is more affordable, change your fees, or get less expensive equipment in the future.
- Talk to your insurance agent. Has your liability changed? You may be able to tweak your insurance coverage if you have fewer on-site employees, a reduced delivery schedule, or new safety practices for your workers.
Be creative when cutting costs and have an open mind about new ways to earn revenues. There are good solutions out there for many business owners; you just need to find them.
If you have any questions about how to improve cash flow, contact us today.
Want to read more about cash flow? Check out the posts in our cash flow series below.