Managing your cash flow is important, but if you do not have any cash to manage in the first place, you are in trouble. Fortunately, there are steps you can take to increase your cash flow and avoid potential cash flow problems.
Here are a few tips to help you row your cash flow boat in the right direction.
1. Determine your breaking point
You should know when your business will become profitable, not because it will affect your cash flow — because it will not — but because it gives you an early goal to strive for and a ready-made target for projecting future cash flow. Negative cash flow and negative profits make for a grim combination.
Focus your efforts on managing your cash flow with an eye toward reaching that moment when you realize your first profits.
To determine your breakeven point, you can either do a unit-based or dollars-based breakeven analysis. Both methods involve using your fixed costs, which are costs that do not fluctuate. These include business needs like rent or utility bills.
To determine your breakeven point using units, start with your fixed costs. Then take your revenue per item sold and subtract the variable cost for each item. Now divide your fixed cost by that number.
When determining your breakeven point with the dollars approach, you first need to calculate your contribution margin.
To find this, take the price of your service or product and subtract the variable cost. Then divide your fixed costs by the contribution margin.
2. Focus on cash flow management, not profits
This may sound contradictory to tip #1, but it is not. Use your breakeven point as a benchmark. After you reach breakeven and your business is profitable, you still need to manage your cash flow, of course.
With your breakeven point reached, you at least know your business is not sinking. Now, you can look at those three categories from earlier — accounts receivable, accounts payable, and shortfalls — and see if any of them look like a potential problem.
If you are breaking even but your free cash flow is already getting tight, it is time to do a deep dive and look for issues.
Ask yourself if you could increase cash flow by requiring that new customers put more money down, or if you need to cut back on your current expenses and make some adjustments in-house.
Being new to the breakeven point is a great period for making these changes, as even the smallest changes can quickly reflect in your profit margin and give you an idea of what is impacting your business cash flow the most.
When your business is more established and your numbers are higher, it can be more difficult to determine what is impacting your financial health, as there are more players on the board and your finances are more complex.
3. Maintain some cash reserves
You will have cash shortfalls. Your business’s very survival may depend on how you maneuver through those shortfalls. If you start with some cash in your bank account, it will be easier to focus on cash flow and you will not stress about the shortfalls.
As a best practice, try to have enough cash reserves to last you for a three-to-six-months.
This amount of working capital can help you in the event of a temporary market downturn, allow you to shop for a new supplier if your current one raises their prices, and so on.
4. Use a cash flow template
The cash flow worksheet will help you keep tabs on your general cash flow management. With a worksheet, you can track your cash outflows and cash inflows, and make general cash flow projections.
Here is our Free Cash Flow Template for Excel. Fill out this worksheet regularly to make sure things are going smoothly and to ensure you do not have any ugly surprises with cash flow in the coming months.
5. Collect receivable as soon as possible
It is easy for customers to take their time on payments, especially if you have language like net-30 or “due in 30 days” on your invoice.
Instead, use a “due upon receipt” approach to show that payment is due in a timely manner.
If necessary, delegate the task of keeping an eye on receivables to a trusted and persistent member of your team. This person will contact customers periodically to collect payment and generally help you with collecting receivables.
6. Encourage customers to pay faster
If it will not hurt your bottom line too much, offer your customers early payment discounts. Also keep credit requirements strict to avoid bad debt. Establish a written set of standards for determining who is eligible for credit.
Enforce those standards rigidly. You do not want every customer walking in the door approved for credit.
Financial institutions have very strict standards for credit, and your business should be no different.
7. Extend payables if possible
In contrast to receivables, get the best deal you can on payables. Extend your payables to net-60 or net-90 if you can. This will give you a higher cash balance but will also increase your debt. Some suppliers charge late fees, however, so make sure you pay on time to avoid being penalized.
This is another reason it is important to have a healthy cash reserve on hand. If you owe suppliers and suddenly run out of money, you are going to damage your supplier relationship and potentially lose your best supplier. They can also withhold your next shipment, which can interrupt your entire operation.
8. Boost sales with creative incentives
Think outside the box and come up with some fun ways to drive sales. Some creative ways to quickly boost sales might include sponsoring a contest, hosting a customer appreciation event, offering referral incentives, or taking your employees on a publicity tour.
These kinds of efforts can not only drive sales, but also boost your reputation and ultimately result in more customers.
9. Designate a cash flow monitor
Assign the task of monitoring cash flow to a trustworthy employee. Have that person inform you when you reach a certain threshold — for instance, when your cash flow hits $1,000.
This person should be knowledgeable in finances, especially your company finances. If you have an accountant with the bandwidth to handle this task, they will make an ideal choice. Otherwise, again, choose someone very trustworthy and reliable.
10. Use technology to your advantage
I recommend QuickBooks Online Cash Flow Planner. Click the following link for a demo.