By Jake Eisenberg
Running a business without a proper cash flow system in place is like driving a car with a blindfold on: you know where you want to go, but you don’t have any idea how to get there. Likewise, you want to grow your business, but it won’t be possible if you don’t keep track of the money that goes in and out of your company.
Without an effective cash flow management system in place, your business will likely fail in the next few years. In fact, 60% of small businesses fail because of cash flow issues. Fortunately, there are doable ways to effectively manage cash flow and at the same time, increase profitability.
1. Understand that profit does not equate to cash flow
Many business owners believe that cash flow and profit are the same. You can’t analyze your cash flow just by glancing at your profit and loss statement. There are multiple factors that make up your cash flow, such as inventory, taxes, expenses, accounts payable, and accounts receivable.
For effective cash flow management, you’ll need to individually dissect each of these factors, along with your profits and losses. Profit is simply defined as revenue minus expenses. Therefore, you can’t understand the flow of cash in your business by knowing how much you earned.
2. Liquidate inventory or equipment
Do you have equipment that you don’t use? Or inventory you haven’t sold? Idle equipment and unsold inventory tie up capital which could have been used more productively. The equipment you own for years generally has a book value equivalent or less than its salvage value. This means you may see taxable gain by selling this equipment.
Customer demands and requirements change all the time, especially when new products and materials enter the market. For this reason, the inventory you haven’t sold can easily become outdated. If you think your inventory is going to be obsolete in the next few years, make sure to sell them as soon as possible to maximize profits and free up working capital.
3. Add new products and services to expand your market and increase sales
Another way to increase cash flow is to add new sources of income, such as adding new products and services. Brainstorm new product or service ideas that would be a great addition to what you’re currently offering. Make sure that these ideas complement your brand identity.
Perhaps you need to start selling seasonal drinks in your coffee shop, or you may want to offer new facial services for your dermatology clinic. Whatever you decide, make sure to get creative. Know more about your target market; their likes, dislikes, and more to know which strategy works best for your business.
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4. Be strategic about vendor payments
Vendor payments also play a huge role in business cash flow. Some suppliers offer discounts for early payments. Take advantage of this and see if you can pay earlier than expected to save some cash. If early payment is out of the question, negotiate with your supplier and ask them if you can pay on the day when it’s most favorable for you.
5. Have a cash reserve
Having a cash reserve can help your business survive the gaps in cash flow. Applying for a business line of credit is a great way to build a cash reserve. Once qualified, lenders will give you a predetermined credit limit where you can withdraw funds from when needed.