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A Three-Part Strategy to Maximize Small Business Cash Flow

Guest post by: Matt Winter

Article Overview: It doesn’t matter where you look these days, you are always sure to find more business advice than you can shake a stick at, but how much of it is relevant to your business and to the issues that you are facing? Your number one priority should be to develop your own strategy to maximize your small business cash flow. Is it? When it comes to small business cash flow, we need to take a step back and stay focused on the small business basics. We want to increase your cash flow and to do that we need to increase the vitality of your business. Increasing the vitality of your business comes down to three main things: increase sales, reduce costs, and increase collections. Let's cut through the piles of small business advice and information that we get on a daily basis and see how those three objectives can help our cash flow.

A Three-Part Strategy to Maximize Small Business Cash Flow

It doesn’t matter where you look these days, you are always sure to find more business advice than you can shake a stick at, but how much of it is relevant to your business and to the issues that you are facing?

Let’s start with the basics: all business buy (supplies, inventory) and all businesses sell (products, services). All businesses need the cash flow from the selling to cover the costs of the buying and hopefully there will be income left over to leave you with a profit. That’s it. Those are the business basics.

Unfortunately, rather than focus on the basics a lot of business advice focuses on loans, financing, and expanding your business to keep up with the latest technology and trends. This is all good information to have at some point, but it is vital for businesses to reach a certain level of stability before they start borrowing money (or borrowing more money) and expanding to a point that may be beyond their capabilities to maintain.

So let’s take a step back and stay focused on those basics. Let’s focus on improving the vitality of your business and that vitality comes down to three main things: increase sales, reduce costs, and increase collections.

Increase Sales

Ok, I know that this isn’t a revelation. Everybody knows that the whole point of business is to make sales and to grow those sales to maximize cash flow and profitability. So why is it that so many small business people lose sight of that fact and instead focus on finding loans or venture capital to expand the business? If your sales aren’t being nurtured then what is the point of expanding? Likewise, if you were really nurturing and growing your sales then you wouldn’t need as much of a loan (if any at all) for expansion.

Never lose sight of the fact that sales are the absolute lifeblood of your business. It might not be fun or glamorous, but those sales are absolutely vital. Yes it’s hard work and yes it can be unpleasant at times, but if you focus on those sales today you can enjoy bigger profits and desired growth in the weeks and months to come.

So we’re talking about increasing sales. That doesn’t mean finding a new product or service to offer. It means selling more of whatever you are currently selling. And how do you do that? Sales are the direct result of finding the “pain” of your customer and fixing it. It doesn’t matter what that “pain” is, all that matters is that YOU can fix it with your product(s) or service(s).

Take some time and look over your current marketing and sales materials. Do they communicate that you have the solution to end your customers’ pains? If not, you need to find a way to do so. Highlighting a style or brand doesn’t necessarily encourage more sales, but communicating how that style or brand solves the pain does. Get into the mind of your consumer, discover their pain, and communicate how you can fix it. That is the way to increase sales.

Reduce Unnecessary Costs

You may be thinking that you have very little in the way of unnecessary costs, but my guess is that if you really sat down and took a hard look at your expenses you would find more than a few items that are there because you think you need them, not because you really do.

The sad fact is that businesses, especially small businesses, spend a great deal of money on niceties, not just necessities. That’s all well and good if you can afford it, but a better strategy would be to put that money aside and know that you have a financial cushion available in case that cash flow turns into a cash trickle.

Nice new desks and fancy chairs are not necessities. Don’t waste the money. Inventory that isn’t moving needs to be given a price reduction so that it will find its way out the door and you can recover the cost. Don’t replace equipment just to get the newest or the shiniest. Let your current equipment stay in use until it costs more to keep it than to replace it.

The terms 'miser' and 'penny-pincher' are usually used as derogatory terms, but when it comes to small business they can be really good things. The goal isn’t to stop all spending - that’s unrealistic. The point is to really take a hard look at what qualifies as a true necessity for your business. Anything that doesn’t qualify as such should be eliminated until a time when your business is more financially stable and can handle the expenditure.



Increase Collections

This is a very important point that is often overlooked when it comes to discussing the financial health of a business. It is almost shocking how many small businesses are so incredibly far out on their collections. Statistics show that most businesses collect somewhere between 45-70% of their accounts receivable. That is a huge amount of uncollected revenue!

So why is it so difficult to collect on those accounts? Many businesses, especially small businesses, find it a challenge to confront difficult or late-payers. On top of that, many are hesitant to send those accounts to collections fearing the loss of the customer. Realistically, if that customer isn’t paying on their account, then what are you really losing?

There are some quick and easy ways to increase your collections. First, stop invoicing if you can. Your payment policy should be payment due when services are rendered. You will regain that unproductive time spent invoicing and be able to do more productive things, like run your business. This will also cut out an unnecessary expense in the form of the money spent on those invoices. If your products or services are priced such that a single payment would be difficult, offer a payment plan. But if you do this make sure that the customer understands the terms, otherwise you’re no better off. For larger ticket items you can also consider offering financing. What this does is ensure that you receive your payment in full for the sale and the customer then has a payment plan with the lender, not with you. There are lenders that specialize in setting up financing programs for venders. We are able to help our customers set up their financing programs in such a way that can appear to be an in-house service rather than a third-party program. The point is, you have options for setting up your own financing program for your customers.

Putting these strategies into practice can do a lot to increase your collections. You will probably still have some accounts that are late-payers, but only a very few. And when you’re increasing your A/R from 70% to 85% or more, those few late-payers won’t hurt your cash flow nearly as much.

Profits Come From a Three-Part Strategy

Whether you are a new business or an established one, these small business cash flow strategies can work for you. Information overload is everywhere and it is all too easy to get distracted from the true small business basics. But if you can stay focused on the three strategies that we’ve outlined here and take a hard look at what is happening within your business, your cash flow will reap the rewards. Keep your eyes on the prize - it will definitely be worth the effort!

by Matt Winter © 2010

All Rights Reserved

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Article Tags: maximize cash flow, maximize small business cash flow, small business cash flow, small business cashflow



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