Article provided by Herb Kimble
As every business owner knows, cash flow plays a crucial role in smooth day-to-day operations. It is very much the fuel on which a business depends for continuing growth and expansion. The competition facing many businesses in today’s marketplace requires an almost constant expansion, which often results in a cash flow crunch.
Businesses can get stuck in 60 & 90-day invoice cycles: cash is coming, but you don’t have it on hand when you need it, or receivables are coming due before payables. There are different ways a business can create a more positive cash flow – some methods involve outright loans, while others can simply be different management policies. Here’s some to consider:
This can be one of the most effective ways to address a cash flow issue. Factoring is a very old business service that in the past was used mostly by large manufacturing businesses. The last 20 years, however, has seen a marked increase in the number of factoring companies that cater to smaller and more specific businesses.
Here’s how invoice factoring works: when your business issues invoices, instead of waiting out the invoice term to get paid, you may sell these invoices at a discount to a factoring company. Terms vary, but the factor can take up to 3% off the invoices, and will pay for a good portion of their value, if not all of it, immediately. The factor will then collect on the invoices when they become due. This is all done in a transparent fashion: your customer will still think they are paying you as they normally would.
Factoring can be a great way to avoid the “invoice gap” that many businesses face: a lot of cash is owed in the near future, but you have none on hand right now. Using a factor is often less complicated than, and preferable to, a small business loan – although in many ways it is precisely that: a short term loan to provide cash flow relief.
When dealing with your payables, remember that every industry has different terms and expectations when it comes to paying suppliers. Not only that, but you’ll often find a difference between the common stated terms and the actual time in which suppliers get paid. By keeping your payables towards the tail-end of this cycle you free up more cash for your business.
In terms of cash flow, this is the ideal solution: you don’t actually pay for goods delivered until you sell them. Consignment is far from common, especially for a small business dealing with large wholesalers, but if the opportunity ever comes up you should jump on it: there’s rarely any reason not to, and in a perfect world you would be able to operate your business entirely on consignment, rendering your cash flow situation ideal. Selling goods on consignment is, obviously, far from ideal for most wholesalers, so you’ll likely find these opportunities rare.
Manage Your Figures
It’s crucial to create a detailed cash flow projection for your business each and every month. The figures need to be examined closely, and in many cases you’ll see ways to increase cash flow without having a negative effect on your company’s operations. One of the first things you should look at is inventory – many business tie up too much cash in inventory, and cuts can usually be made here without a huge impact.
Keep Inventory To A Minimum
One of the best ways to increase cash flow is to work with as small an inventory as possible. Depending on the type of business you operate, you may be able to find suppliers who work on a very quick turnaround. Many businesses to keep too much inventory on hand, mainly out of habit and convenience. Although keeping a smaller inventory will require more attention and precise management, you’ll be rewarded with a better cash flow.
Focus On Growth Areas
If you’re in need of a larger amount of cash, consider selling or soliciting investment in profitable part of your business – this will give you cash to focus on a part of your company with more growth potential. In many situations the most profitable part of your business and the part with the most growth potential will be different. Capitalizing on the profitable part of your business gives you the cash flow needed to develop the part of your business with the most potential for growth.
If your business finds itself in a more dire cash flow situation, you may have to look beyond these methods above. Less appealing and more drastic measures include outright loans and selling assets. In some cases it can even be beneficial to sell and lease back your property. For most business most of the time, though, these measures won’t be necessary: smaller cash flow issues are the more common problem.
By looking at the advice above, we can see that cash flow problems needn’t be a constant issue. In many cases small changes in management and an attention to detail can create positive cash flow changes. By doing things like paying close attention to – and reducing – your inventory, tracking your cash flow closely, and researching the “true” payment terms in your industry, you can have a positive effect on your cash flow without assuming debt or affecting your operations negatively. If you find yourself in a more serious cash flow situation, consider invoice factoring before looking into loans and the outright selling of assets. Most importantly though, remember that cash flow is vital to strong business growth, and it should therefore never be overlooked.
This article was written by Herb Kimble. Herb Kimble runs a film production company called CineFocus Productions in Los Angeles. He is also working toward the release of a streaming network, called urban Flix. Find out more info about Herb Kimble, on his About.me page.