5 Ways to Solve Your Company’s Cash Flow Problems
Cash is the lifeblood of any company. Over the years, I’ve worked with hundreds of clients, and the number one pitfall I see for business owners is an inability to correctly manage cash flow.
So, what sort of things can you do, as a business owner, to solve your company’s cash flow issues?
#1 – Take Your Time When Paying Vendors
Nobody wants to be known as someone who takes their time paying bills. But the way you go about handling your payables can significantly help your cash reserves.
Let’s say you’re a reseller of goods that you buy from China. When you receive the goods, you get an invoice from your supplier. Should you pay it right away?
Paying invoices right away is an easy way to empty your bank account when you may need the cash for more immediate things, like paying your employees. Most vendors give you a due date for their invoices; pay attention to this. Generally the due date ranges from immediately after the goods are received to as long as 90 days. Keep in mind that these terms can often extendable, and it is worth it to ask your suppliers for longer terms.
Keep that money in your hands as long as you possibly can. You never know when something unexpected (and expensive) will happen to your business.
#2 – Use A Business Credit Card
Having a credit card for your business is incredibly important and carries many perks. It delays cash outlay for expenses: Did your copier break and now you have to spend $8,000 on a new one? Put it on your credit card and hold on to your cash another month.
A business credit card also helps you manage employee spending; if employees have a company credit card, you can see their spending right away. You don’t want to get hit with a large unexpected expense reimbursement from an employee because they haven’t submitted an expense report in 6 months.
A business credit card can build your company’s credit. If you’re a small business, you may need to at least two years of credit history before a lender feels comfortable backing you (#5 discusses this in more detail).
Finally, a company card can get you benefits and rewards. Seriously, who doesn’t want to make money by spending money?
Make sure you pay off the statement balance each month and monitor your spending or else you’ll get stuck paying high interest rates.
#3 – Reduce Your Inventory
Let’s say you’re running a clothing store and the holidays are right around the corner. You’ve purchased a ton of extra inventory in anticipation of the surge of customers you’re going to be seeing. What are you going to do when the holidays are over and you haven’t sold everything? Are you going to keep it in storage? Please don’t.
If you have a surplus of inventory you’re basically letting cash sit on your shelves. Always strive to be lean on inventory. Sometimes it may be tempting to buy in bulk to get a discount, but if you can’t sell all of the product right away, you are tying up cash that is critical to your business operations.
An easy thing to do is to keep track of the age of your inventory. Once an item reaches a certain age, sell it—even if it means selling it off at a lower price.
#4 – Collect Your Receivables
Have you ever looked at your profit and loss statement and deduced that your company is profitable only to see little-to-no cash in your bank account? You might be having a problem with your receivables.
You may have provided someone with $5,000 worth of services—which will be reflected on your P&L—but if you haven’t been paid yet, that $5,000 is worthless. Counter to the argument that you should wait to pay your vendors, you should never wait to collect from your clients. Yes, it can be uncomfortable asking for money, but the health of your company depends on it. Don’t want to do it yourself? Maybe you should consider hiring a third-party to handle it for you. You’ll have to pay them a small collecting fee, but it’s a small price to pay if it means you can get paid.
#5 – Consider Getting a Line of Credit
The best time to open a line of credit is before you need it. Your business should always have savings on hand, but there may be times when it won’t be enough to meet your cash flow needs. If you think there is even a small chance your business will need cash in the future—whether it be to deal with seasonality, a big capital expenditure, inventory purchase, etc.—you should consider opening a line of credit. No interest accrues until you draw on it, so there is no expense to just having it available.
A friendly warning to all those businesses out there who operate on cash and underreport income to avoid paying up to Uncle Sam: When you need financing, the bank is going to ask for tax returns from previous years and they want to see high revenue. If you are underreporting your income to save on taxes, it could negatively impact your ability to get a loan.