Cash Flow Essentials

Cash Flow Essentials

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January 9, 2016

One of the biggest tripwires for new startups is the time gap between when you pay your employees and suppliers and when you collect from your customers or clients. If you don’t have sufficient cash flow in your business, that gap can seem like a yawning chasm.

First of all, you need to gain an insight to cash flow essentials generating an as accurate a picture of your future cash flow as possible. Annual, quarterly and even weekly projections may all be essential depending on the circumstances – the emptier the coffers, the closer the future you need to peer into – and will help you plan for problems before they happen.

Once you have your forecast and an accurate view of your cash flow essentials, you may find you need to make adjustments. Without wishing to sound overly brutal or mercenary about it, cash flow management consists of finding ways to delay cash outlay while accelerating cash collection, and there are various accepted techniques for doing so.

Deposits. 
Insist on deposits being paid when orders are placed, thus spreading the income.

Credit checks. 
One way to reduce late or non-existent payment is to institute a policy of credit checks for new non-cash customers.

Bundle. 
Combining products and services can be a way of increasing the up front price (and therefore profit) by offering added value that costs you nothing in the short term; for instance, extended guarantees and maintenance agreements sold with appliances.

Operate various payment policies.
Monitor payment activities and adjust your policies where necessary. For, instance, you might implement a cash on delivery model for customers who are consistently slow in paying.

Increase the price on the back-end. 
New customers are attracted by low prices but these prices may not be sufficiently profitable for your business’s needs. However, you can balance out low profits from new customers by setting a higher price on later products and services that you sell to them. In other words, your initial product or service can act as a form of loss leader in the expectation that your future revenues from the sale of other products and services to these customers will more than compensate for the initial low margins.

Discounts. 
Encourage customers to pay up by offering a discount for quick settlement of their invoices.

Shed old stock. 
If you have old or outdated inventory that is costing you money (or is about to as your supplier’s invoice becomes due) shift it for whatever price you can get. It may make more sense to do this while you still can rather than waiting for an opportunity to sell the product at its standard price – one which might never come.

Pre-selling and buying back. 
if your product is desirable enough, customers will pre-order, buying (and sometimes even paying) in advance in order to ensure that they have the product when they want it. Another option is to offer to buy back old products at a pre-set price (thus making it more likely that the customer will also buy their new product from you.)

Invoices. 
Always, always issue them as soon as possible; at worst, an issued invoice is pending payment; an unissued invoice will never be paid. Having issued them, track them so that you know when and who to chase up when the time comes.

Repeat business. 
Retail businesses tend to be low-cost, low-profit and reliant on volume of sales. In such businesses, repeat customers are not only desirable but essential (you may not even be seeing a profit until the third or fourth sale). Use strategies such as frequent-shopper programs and loyalty cards to encourage patterns of repeat buying behaviors.

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