Cash. It’s something every company needs, regardless of your core competencies. Perhaps you’re passionate about baking the best muffins in the world. Well, you still ultimately need to sell those muffins and make cash. You might make incredible muffins, but that doesn’t necessarily mean you know how to optimize your cash flow.
Defining Cash Flow
Before we go further, let’s go over what exactly “cash flow” means. Cash flow is all money transferred in (inflows) or out (outflows) of your business.
Generating positive cash flow (where inflow exceeds outflow) is every company’s goal. Cash flow statements show companies’ use and sources of money and are part of accurate financial documentation.
How You Can Improve Cash Flow
Cash inflow is essential, but don’t overlook your cash outflow either. Being able to responsibly manage all of the money you touch, whether it comes in or goes out, will keep you from getting a visit from the IRS and make your banker happy!
No one wants an audit, and accurate financial records that demonstrate responsible handling of money will come in handy regardless of whether the government examines your books or not.
Here are three tips that will help you improve your cash flow:
1. Manage Accounts Receivable Daily
Your accounts receivable might not seem to be assets, but they are. They represent the promise of money from your customers and while it would seem like accounts receivable is a liability because the cash isn’t in hand yet, that’s not how banks see it.
A large number of accounts receivable shows that you have a steady business, and well-documented accounts receivable demonstrate responsibility. If you need a loan for some working capital, banks are more likely to lend to you if you illustrate that you have many accounts receivable.
That said, even if you have an extraordinary amount of accounts receivable, there’s still work to be done. If you want to ensure you get paid as fast as possible, you should:
● Send invoices immediately
● Follow up on overdue invoices
● Set up prepayments whenever possible
● Use outside help from firms like Zabelco to optimize your processes
You must do this work daily to ensure you don’t fall behind and lose track. You might not have invoices to send every day, but going over your transactions can show you any discrepancies you need to address.
2. Consider Increasing Prices
You might feel you will lose business if you increase your prices, and you might be right. However, the business you lose can be offset by the increases you see from bringing in new customers at better margins.
Because price is psychologically linked to quality, an increase in price can suggest that your products are worth the premium. If your cash flow is weak, this might be a good solution.
However, just how much you should increase your prices can be a tough decision. You’ll need to:
● Research the prices of competitors
● Analyze customer habits
● Look into changing products to justify the extra cost
● Get assistance from firms such as Zabelco to identify a solid pricing strategy
If you believe in your products and customers are buying them at the current price, reliable customers probably won’t disappear if you nudge your prices up.
3. Reevaluate Operating Expenses
The building you work from could be perfect. Or it could be too expensive, in the wrong location, or unfit for your needs and in need of renovation. Finding areas of your business that are costing you more money than they should is essential for improving cash flow.
While you’re figuring out how to increase inflow, you should also be finding ways to decrease outflow. When you’re analyzing your expenses, you should:
● Cut unnecessary expenditures
● Streamline inefficient processes
● Consider investing in more efficient equipment
● Reconsider your space needs
● Run your analysis by Zabelco to optimize business practices and cash flow
You never know when more up-to-date computers or moving to a building with lower rent could dramatically impact your net profits.
Zabelco Is Here to Help You Win
Zabelco is more than just tax and accounting services. We are also business growth coaches dedicated to transforming your business into a world-beating success. If you need help optimizing your cash flow, connect with Todd to learn more at tzabel@zabelco.com.