As a business owner cash flow is something that can keep most of us awake at night. Time after time it has been reported that most companies fail not because of lack of profitability, but of cash.
It comes as quite a shock when, even though your business might be profitable, lack of funds can mean you no longer exist as a viable business. It is quite simple to keep the cash coming in so as to fund the operations of your business by putting systems in place, and the investment in time and money would be pay itself, many times over.
As with any business there are factors that can affect the state of ‘cash flow' in your business. One of these factors is profitability: it goes without saying that if either your prices are too low or your costs are too high, you would inevitably have cash flow problems. One way to increase profitability as we all know is - ‘price increase'. For most business owners there is always a reluctance to do so but lack of ‘appropriate' and ‘timely' can have a huge ‘detrimental' affect on your business.
One of the ways you can asses the ‘right' price is:
1. Understand Price vs. Value: You must re-focus on the ‘value' your service or product is delivering to your customers. This would help you revaluate the ‘price' you are charging now.
2. Understand your Customer: Most customers stay with you because they like to work with you with ‘only' 10% of customers ‘price' driven, as most are like to stick with you for.
3. Understand your Message: If you are willing to underline the ‘value' you are delivering in terms of ‘helping the customer's operations, tailored products, etc.', most customers would be willing to stay with you and pay higher price.
Four quick steps to bring cash now in your business:
1. Customer Account Statements: This is something you should be doing on regular basis and even if your accounts are in a mess, I would suggest you still send the statements out. There are two simple reasons for sending statements out regularly. First, your Customer would pay more attention to you as a supplier if they receive regular statements and would start including you in their payment runs. Second, even if the statements are in a mess or items disputed, you can commit your customers to paying some of the invoices, right away. This of course doesn't replace Policies and Procedures for ‘Cash Management' that should part of your Business Systems.
2. Accepting Discounted Payments: I would go as far as suggesting that this should be part of your cash collection strategy. Again there are two things to consider: First, Your product pricing should have room for ‘Early Payment' discounts and you can go as far as using such ‘pricing' and ‘payment discounts' to more slower paying customers. Second, If you are not incurring bank Overdraft Fee/Interest Charges at this stage, then best to leave this policy out and concentrate on putting systems in place to deal with such customers.
3. Staggered Payment Terms: I would suggest new customers are kept on staggered payment terms with regards to minimum amount spend and credit period. And again if they pay on time their terms can be changed. Another incentive for faster payments is to put in place regular weekly/fortnightly payments or even initial deposits, to ease working capital requirements of your business.
4. Supplier Discounts and Credit Terms: One of the biggest reason most business face cash flow problems is because of timing mismatch between the customers receipts and supplier payments. One way to overcome is to negotiate discounts or extended credit terms with your suppliers, first such place to look for such accounts are the ones that are on standing orders or direct debits.
The above steps are to align the two sides of the cash flow equation, and do not replace a consistent Policy and Procedures, where cash management is concerned.
As you can see, you can still turn around the‘cash flow in your business in the short-term but to run a well-oiled business , you need profitability and a water tight cash management system, and then only you can maximise growth and increase sales in your business.
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