As a business owner, what will you consider most important to the survival and growth of your business especially in a tough economy. Is it sales, profit or cash in the bank? While sales is good, profit-making is the reason a lot of us are in business. However, without a steady positive cash flow, the business may close up sooner than it started.
So what’s the difference between sales, profit and cash flow and why should you care? See our differentiation below:
Therefore, a positive cash flow means that;
• you are receiving more money than you are paying out, which is good for your business;
• your business is healthy; and
• your business can deal with unexpected expenses or outgoings that may come up during a month, without the need to rely on credit from suppliers or borrowing.
A positive cash flow also means the business assets are increasing, workers can be paid, debts can be cleared, capital for growth is available and the business is equipped to weather future financial challenges.
There are some simple ways to help you maintain a positive cashflow in your business. We have analysed 3 of these ways below:
1. Improve your receivables
The following techniques will be helpful:
• Offer incentives to clients/customers for early payment.
• Send out your invoices promptly and follow up promptly if payments are slow coming.
• Ask for deposit when customers make orders.
• Encourage a repeat business by using incentives such as discounts and loyalty bonuses to keep your customers coming back.
• Have a C.O.D (cash on delivery) policy for slow-paying customers
• Sell off old or outdated inventory for whatever amount you can get
Mind you at this point, you may have to analyse your customers list and do away with customers that do more harm than good for your business. You must understand that you do not have to service everybody. Master the art of choosing your clients and not them choosing you.
2. Watch your payables
Keep your eyes on your expenses. Any time you see expenses growing faster than sales, examine costs carefully to find places to cut or control them. Here are some tips:
• Ask for credit terms and stay faithful to it. Don’t pay it early or late.
• If you must pay in advance, ask for early payment discount
• Don’t select your vendor solely on basis of lowest price. If you compromise on quality you might pay twice as much to repair the damage.
3. Achieve a balance
• Don’t pile up your bills, it may accumulate so fast and so high
• Pay your taxes promptly and negotiate instalment payments where you can
• Resist the urge to offer ‘unsustainable’ large discount
• Pay yourself first and don’t finance personal expenses from the business purse
• Maintain a culture of cash savings (You can choose to set aside 10% – 20% of cash profit as emergency reserve)
Remember, the objective is to pay out less cash than you collect. Getting this right isn’t easy, but it’s very simple. Get paid as soon as possible, only spend money you have, and only if it will be used to help you make more money.