Cash gives you options.
My clients know very well that this is one of my favorite mantras.
Cash gives you the options and flexibility to determine when and how you want to do things in your business.
By optimizing your cash flow, you can actually increase your cash flow. Optimizing cash flow simply means managing how fast money comes into the business and letting go of the money going out of the business slowly.
Often my small business clients end up letting other people use their money, instead of using it in their own businesses.
What do I mean by that?
If your vendor requires payment in 30 days and you pay them in 10, you’re letting the vendor use your money unnecessarily.
Additionally, large businesses sometimes take advantage of smaller ones by extending terms. For example, they’ll say that their terms are 90 days and that’s when they’ll get paid, regardless of what you put on your invoices or purchase orders.
It’s sad, but it’s true.
How can you actually increase cash flow, you ask?
1. Take advantage of the payment terms vendors offer. This is the easiest option. If a vendor says you don’t need to pay them for 30 days, make sure you’re taking advantage of that. Don’t let go of your money until you have to.
But of course, with this caveat: be smart with it. If a vendor offers a 2% discount for paying within the first ten days, consider taking advantage of it. If you have the cash on hand to afford it, that’s free money back into your business. It’s like getting your purchase on sale!
2. Enforce your own payment terms. Similarly, when you have your accounts receivable you need to make sure you communicate and then enforce those terms. Your customers should clearly understand when you need to be paid.
This means that you also need to have a follow-up procedure to chase the money that’s owed to you. If you haven’t been paid when money is due, a process should be in place to have someone on the phone with your customer letting them know and asking when the company should expect payment.
3. Take a multi-step approach. Say you need to purchase a piece of equipment. The best way to make that happen and conserve cash flow is to pay the minimum amount for a down payment and finance the remaining balance.
You can save even more cash and increase cash flow if a vendor is offering a special financing deal such as no money down. Take advantage of it!
This conserves cash flow in the long-term while allowing you to leverage the cash that you do put out for that piece of equipment. You will be earning cash on that purchase, which hopefully will exceed the cash outflow to make your monthly payment.
The bottom line is this: anytime you can get ahead of the curve as it relates to cash flow—more cash in or cash out more slowly— will result in a positive cash flow position for your business.
And who doesn’t want that?!
But I won’t lie, we are getting into touchy territory here. When it comes to debt, it’s all a comfort level thing. Some people are in the “I don’t want to have any debt, ever!” category…which I understand, but sometimes taking on debt is a smart business decision.
(I wrote a whole article about debt awhile back, Debt: Dangerous Risk or Path to Growth.)
So how can I help?
I work side-by-side with my clients to get them comfortable with debt. Know this: I wouldn’t have them take on debt if I wouldn’t be 100% comfortable being in that situation myself.
I get them comfortable with the concept first, and when the time comes for a big purchase we sit down and go through all the numbers. Crunch, crunch, crunch. We make sure they will be able to have enough cash flow for the purchase (and for ongoing operations, too!), and we get very conservative with the numbers so there are no surprises later.
Usually when a business is taking on debt for a new piece of equipment or a new vehicle, that means they’re growing and adding capacity to the business.
That’s GOOD news!
All of that revenue from the new equipment will be incremental to the business, meaning that you’re growing the business alongside your loan payments.
If you take away just one thing from this article, let it be this: don’t deplete your cash reserves when you could be sitting on the cash and have it available for options and opportunities that might arise – like buying a business, buying a building, hiring a new employee, or expanding your current business.
Want to improve the cash flow in your business? Contact me here to find out how I can offer more financial management horsepower for your business – when you need it most.