Here are three ideas to help improve your business’ cash position.
Focus on accounts receivable. The time value of money says that a dollar today is worth more than a dollar tomorrow (or at some point in the future). Remember the best way to improve cash flow is to encourage customers to prepay for orders and to actively manage your accounts receivable. What to do now: Actively manage your accounts receivable activity. Calculate how long it takes (in days) for customers to pay their bills. Provide incentives to pay receivables more quickly and stay on top of slow payers. Identify slow paying customers and take action to close the door on future problems with them.
Every non-cash asset matters. It is important to build your cash reserves when times are good. So review every asset on your balance sheet – accounts receivable, prepaid expenses, fixed assets, and inventory. Determine what it would take to convert each of them to cash.
What to do now: Create a fixed asset plan and stick to it. The plan should target how much you wish to spend each year and how you are going to pay for it. Also consider actively retiring assets before they have no value. Turn inventory back into cash by calculating your average inventory turns. Handle overstock items and obsolete items timely. If you have pre-paid assets, make sure you are getting a steep discount for paying in advance and if not move to paying the bill monthly.
Forecasting is your friend. According to a survey by The Service Corps of Retired Executives, 82% of small businesses that eventually fail do so because they run out of money. The best way to ensure this doesn’t happen to you is to create a rolling 12 forecast with a worst, most likely and best case scenario. This will tell you whether you have future cash flow risks long before they occur. It also keeps your forecast relevant as you look at it once a month.
What to do now: Create your forecast and identify any future cash needs. Then put a plan in place to address any projected shortfall in the future. Having a line of credit in place long before you need it can help navigate cash flow issues.
By keeping these cash flow basics in mind, you will greatly improve the likelihood your business will survive and thrive!