Cash flow is the primary responsibility of the business owner, yet many owners aren’t motivated to improve it. Everyone knows more money must be taken in each month than sent out, but many owners make the mistake of believing high revenue ensures an excellent cash flow. One doesn’t necessarily guarantee the other. A business can appear profitable, but still have significant cash flow issues. Poor cash management is the primary reason a small business will fail.
To begin, make it a habit to forecast cash flow 12 weeks in advance. Cash flow is not the same as a budget, and while it may be challenging to reconcile the figures to the dollar, the bookkeeper should be tracking all previous data to provide the most accurate forecast. Even when not experiencing a shortage, the cash flow forecast allows the owner to understand what amount of funds are available for improvements, taking on or retiring debt, adding staff, etc. Get motivated with these suggestions and put an end to the uncertainty and anxiety of meeting payroll, overhead, funding long-term capital improvements, the frequent “out of nowhere” expenses, and addressing your dream list for your succession. Isn’t it time for some peace of mind?
- Control yourself. Implement a system that prevents “impulse purchases” even when they promise improvements that appear to have significant benefits. While it may be a great idea, don’t drain your reserves to pay for it without giving it some thought as to its long-term benefit. Just as magazines, candy, and gift cards line both sides of the check-out lane to tempt the grocery shoppers to buy on a whim. Many owners fall prey to impulse purchases that are poorly thought out and, in the end, unnecessary, at the expense of cash flow to satisfy the belief it will solve whatever problem it is being promoted to solve. Impulse buying is an action designed to satiate a need that is usually not apparent as pressing until given some thought. Everyone is vulnerable. Create a system that prevents impulse buying and requires time to reflect the real purpose of and motivation for the purchase. Remember that a large number of businesses rely on impulse buying. Don’t take the bait. Create a system that requires the accountability that comes with an automatic waiting period and stick to it. Beware of purchasing products or services that require a contract for recurring expenses. Concerning recurring costs, keep all overhead flexible, when possible, weighing the risks and benefits for long-term leases and other agreements. This includes leasing space.
- Control your staff. Evaluate the responsibilities and efficiencies of the staff. Avoid the urge to automatically add to your team when an employee complains they don’t have enough time to complete their work. Taking time to observe their actions and habits over some time—sometimes as little as a few hours—provides the necessary insight into their efficiency and productivity. Many owners use their workday to mix work and personal time. Most often, employees scrutinize this behavior but fail to realize that unlike the owner, their workday ends at 5:00 when they exit the building with little thought of business until the next morning. While it is the owner’s privilege, it is often a surprise to learn employees are enjoying the benefits of ownership without the worry and headache that often accompany it. Try to get an idea for the number of times employees are paid to conduct personal business during the workday for phone calls, online shopping and social media activity, smoking and other social breaks (not a requirement for the company to provide in most states) along with other nonproductive activity before adding the expense of a new employee. Without being known as a demanding boss, there are reasonable chance expectations that could be more significant. Take time to train employees on the reasons for and necessity of following workplace policies and meeting the aspirations for their position. Remind them they will be held accountable for the tasks they are assigned and then make them accountable. Also, identify an employee to be held responsible for determining the appropriate level of inventory necessary to conduct business efficiently. Inventory management is often overlooked as an effective system to increase cash flow, so find someone and make it their sole responsibility for doing so. Last, consider the ways the cost of taking on a new employee will impact cash flow. If the result is more cash in than out, place the ad! When a hire is made with the sole purpose of aiding the current staff, take a good look at productivity, expectations, and training first. Using what is known to cause the right decision has lasting benefits. So make the hasty decisions, so take time to gather the facts and always train as a first step.
- Control your customers. Don’t rely on a limited number of customers to keep you in business. Losing one would be devastating to cash flow. Conversely, understand the costs for maintaining customers known to be the source of headaches—the ones who don’t pay or insist on multiple return visits before being satisfied with the work or product—and cut them loose. They cost the business money. Understand the impact of late-paying customers and consider getting payment upfront or, at a minimum, adhere to a system of same-day invoicing. Chasing down money comes with costs.
Be inspired to take control to improve cash flow. What’s in it for the business owner? Likely a better night’s sleep! As often as possible, get paid for the product or service upfront. Collecting the payment at the time of the transaction ensures, and when this is not possible, implement the same day invoicing system.
At Cogent Analytics, we never stop looking for ways to improve your business and neither should you. So, check out some of our other posts for helpful business information:
Cogent Analytics, LLC is a business management consulting firm, with a primary focus to help small to medium size, privately held businesses achieve success and long term profitability. Cogent provides powerful solutions with integrity and transparency to privately-held businesses throughout the United States.
