By Evan Carmichael on October 27th, 2011
Today’s post is brought to you by American Express Canada. They recently launched the Amex for Business Canada Facebook Page so if you’ve liked my posts and videos in the past, please check out it out and let me know what you think.
Today’s post is on cash flow management. You can run a profitable company but still go out of business because of poor cash flow management. Cash flow is all about when money comes in and when money goes out. If you’re paying too much money out before money comes in then you’re flirting with danger.
Here are my top 5 tips to help you manage your cash flow:
1) Project your cash flow
Try to map out for the year when you expect money to come in and when it’s going to go out. The regular monthly expenses are easy to predict but you don’t want to get caught off guard by large, annual expenses that can sink your company. Government taxes, insurance, and equipment upgrades are three examples of annual costs which, if you don’t project and prepare for, can leave you scrambling last minute to come up with extra cash.
2) Try to get recurring revenue
The Holy Grail for many businesses is recurring revenue. If you’re trying to get investors into your company, one of the things they’ll look at is if your business model allows for recurring revenue. Having clients pay you on a regular basis makes it easier to plan your expenses and also helps reduce your stress levels! Try to move as many clients as you can to a subscription model where they make regular payments every month for the product /service that you are giving them. It doesn’t work for every business but you may be able to add on additional services that can be recurring revenue streams and bring in some money. That way, if you end up in a cash crunch you’ll be better prepared.
3) Follow up on your accounts receivable
How long does it take for your clients to pay you? The easiest way to inject instant money into your company is to call up everyone who owes you and ask them to pay their bills. Over the long term you should consider eliminating clients who take too long to pay if they don’t change their ways. You can also offer incentives for clients to pay earlier either through a price discount or a value added product or service.
4) Keep an emergency fund
When you’re first starting up, all the money you make goes back into your business. After you get past the point of worrying if you’ll survive or not, you should start an emergency fund. This is money that you have on hand to get you through a cash crunch if you have an unexpected expense or your revenues fall short of projections. The common rule of thumb is to have three months worth of expenses in an emergency fund so you can continue running your business and pay your staff and suppliers while you get through the crisis.
5) Cut unnecessary expenses
It’s good practice to review your expenses every month or quarter to see if there’s anything you’re paying for that you don’t really need. Look especially hard at the recurring expenses and if you have staff, dig deep into their expenses with them. Are you still using everything on your expense list and getting good value in return? If you do a quarterly check you can almost always find at least one thing that you subscribed to and no longer really need. It’s too easy to sign up for something and forget about it – make sure you examine those expenses regularly and cut out the ones you don’t use.
Bonus: Negotiate with suppliers
The common wisdom around cash flow management is to negotiate better terms with your suppliers – either try to pay less or stretch out the time period so you can pay them later.
I usually disagree with this advice.
If your supplier is a large company and when you call in they can only find you if you give them your customer number, then fine – negotiate the heck out of everything you buy from them. Usually the big guys dictate the terms though and there’s very little wiggle room once you’re in a signed contract.
If on the other hand, your other suppliers are medium-sized companies, solo entrepreneurs, or self-employed contractors, these guys will feel the pain if you squeeze them too hard.
I’m a big believer in building loyalty with all of my contractors and suppliers. I rarely take the lowest price and I almost never negotiate terms. I want them to be part of my team and think of ways to make my business better. I want them to be loyal and love working with my company.
It’s not only a lot more fun working with people you like working with, it makes sure that they deliver the best quality product or service that they can – and if you ever have an urgent problem they’re going to bend over backwards to help you.
I usually pay my suppliers and contractors as soon as they send me an invoice even if they have 30 day terms attached. It might cost you a little more upfront but if you have suppliers who love working with you and feel like they’re a part of your team, you’re on your way to building a company that will be able to get through any crisis.
Once again, today’s post is brought to you by American Express Canada. They recently launched the Amex for Business Canada Facebook Page so if you’ve liked my posts and videos in the past, please check out it out and let me know what you think.
Tags: additional services, american express, american express canada, amex, business canada, cash crunch, cash flow management, equipment upgrades, extra cash, Facebook, flirting with danger, flow 1, government taxes, holy grail, monthly expenses, profitable company, revenue streams, stress levels, subscription model, t project