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Cash flow is the lifeblood of any business, and healthy cash flow is especially important if you don't have large cash reserves. A 2016 JPMorgan Chase Institute study found that half of all small businesses hold a cash buffer of less than one month. With such a small reserve, when hiccups occur—such as customer cancellations, back orders, order-filling mistakes, freight damage or delayed customer payments—a business's solvency can be put in jeopardy. Protect your business by taking the following steps to maintain a robust cash flow.
1. Sell old inventory. If you have poor-selling or overstocked inventory, selling it at a discount can free up cash to focus on better-selling items.
2. Require a deposit on large or custom orders. Asking for a deposit of 40 to 50 percent of a product's cost reduces your risk of taking a financial hit if a timely payment isn't received. It's important because custom orders typically have poor resale value.
3. Create incentives for early payment and penalties for late payment. Offer a small discount for early payment. Write late fees into your credit terms or start charging interest if a timely payment isn't received.
4. Address delinquent accounts promptly. Invoice as quickly as possible after the purchase, then rebill immediately if payment isn't received by the end of the term you've set for payment. Follow up with an email or phone call, and ask if there is a specific reason the bill is unpaid. Empathize with the situation and then initiate discussion of repayment plan options. Consider hiring a collection agency for particularly troublesome accounts.
5. Check your pricing. Have your prices kept pace with your rising costs? If it's been awhile since you raised prices, it could be time for an increase. Check your competition. If they've raised prices, you should too. Customers understand the need for small, regular price increases and are usually willing to accept them.
6. Review customer profitability. Don't assume that a certain account is profitable just because it generates a lot of revenue; you also have to examine your costs. If you discover unprofitable accounts, discuss the possibility of raising prices or trimming service with the customer to find a way to make the account profitable.
7. Get new quotes for business expenses. Regularly examine how much you're paying for insurance, phone and internet service and other monthly bills. Get three quotes to be sure you're not paying more than you have to.
8. Ask vendors for longer payment terms. Negotiating terms of 60 days or more may give you an opportunity to complete the work, bill your customers and receive payments prior to paying your vendor. Favor suppliers that offer more generous terms.
9. Lease vehicles, computer systems and other equipment. Although it may be more expensive in the long run than buying, you pay a lease in small increments, which can improve cash flow. Also, you may be able to deduct lease payments on your income tax return as a business expense.
10. Secure a line of credit. A business line of credit can help you cover a lapse in cash flow for short periods of time. The rate on a business line of credit may even be less than the late fees your vendors charge.
California Bank & Trust business bankers have expertise in a wide variety of industries and can help you get the financing you need to move your business forward.
This financial institution does not give tax advice. Consult your tax advisor for information specific to your situation.[cite::171::cite] [cite::172::cite]