Cash flow is an important aspect of business. Whether you’re a new business owner or a seasoned pro, it's important to maintain a positive cash flow. Every business needs cash on hand to be able to meet their current obligations and to be able to make investments for the future.
Having cash on hand is a simple concept to understand, but it can be difficult to maintain a positive cash flow consistently when you have a lot of expenses and not much income.
In this article, we'll talk about ways you can improve cash flow in your business, the difference between cash and profit, and why maintaining a positive cash flow is important—especially during times when a recession may be on the horizon.
What is Cash Flow
Cash flow is the money flowing in and out of a business during a set period of time. And when it comes to your business, it’s important that you have a positive cash flow—meaning that more money comes in than goes out.
Why Cash Flow Is Important
Having a positive cash flow means that you can pay your bills on time and continue to operate without having to worry about running out of cash. It also makes it easier for you to invest in growing your business, because there will always be enough money coming in from customers to cover those investments.
Cash Flow Vs. Profit
If you're in business, the most important thing you need to know about cash flow is that it's not the same as profit. While cash flow is solely concerned with the flow of money into a business over time, profit is the amount of money that remains from sales (revenue, or the top line) after expenses have been deducted from it.
They are both vital to the health of a business. Trying to increase the profit and/or earnings of a company is always a good goal to have, but without maintaining a positive cash flow, the business will be unable to operate. Cash is the lifeblood of an organization. It allows the company to continue day-to-day business by making sure bills are getting paid on time. Profit may reflect growth, but cash flow reflects a company's ability to remain solvent during times of crisis. Ultimately, cash flow is what will keep the business running. So, if you're struggling with cash, make that your first priority and deal with profit later.
So now that we have a better understanding of cash flow and how it differs from profit, let's talk about some of the ways organizations can improve their cash position. We did a lightning round with a few of our certified coaches asking them to provide ideas on ways to improve cash. Here's what they came up with:
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Ways To Improve Cash Flow
1. Look at Inventory Levels
Frequently reviewing your inventory levels can help keep costs down. Tying up too much money in parts or products can hurt your cash flow. Make sure your business isn't holding too much inventory — only order what you need. Also, take into consideration the supply chain for your industry. For example, if the supply chain proves unreliable, you may start carrying 3 weeks' worth of inventory. But if the supply chain levels back out and return to business as usual, you may only need to carry one week's worth of inventory.
2. Extend Terms With Customers
You can gain business by providing the option to extend terms with your customers. For example, say the customer wants to buy your product/service but doesn't want to pay for it today, but two months from now. Allowing them to do so keeps their business with you, gives you a competitive advantage, and builds a stronger relationship with that customer. One company gained 15% in revenue for the month by offering these flexible terms.
3. Offer Discounts To Customers Who Pay Early
Offer discounts to customers who are willing to pay faster. When customers pre-pay or pay within 14 days rather than 30, you're able to get cash quicker for your products and services.
4. Pull In More Business By Offering a Price Match
Gain business and increase sales by offering a limited-time price match. By offering a price match, you will naturally gain new customers and competitive data on the prices the competition is offering. One construction company did this to increase the number of projects they had coming in. By doing the price match, they had 36 jobs come in over 2 months.
5. Negotiation With Vendors
Discuss terms with vendors to see if you can extend payment or negotiate better pricing. Paying vendors later can increase cash flow today.
6. Send Invoices Out Immediately
Don't delay sending out invoices. The quicker invoices are sent out, the quicker the company gets paid. Educate your team around the importance of sending out invoices as soon as possible. Set a standard and make it part of your everyday business practices. You'll see receivables increase quicker this way.
7. Consider A Price Increase
A price increase isn't always the answer to increasing sales, and the last thing you want to do is upset customers. However, periodically reevaluating your pricing structure is a healthy thing to do. Look over your costs — if your costs have gone up over the past year, maybe it's time to increase prices. If prices stay the same, while your costs continue to soar, your margins will start to pay the price. If a price increase makes sense for your business, it's a great way to maintain healthy margins and increase the amount of cash coming into the business.
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