Cash Flow
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Cash Flow

Q: I want to make some changes next year, but especially I want to increase my cash flow. How can I do that? — Jerry

A:  While it is no surprise that cash flow is a huge issue for almost any business that fails, and that businesses that do well are usually awash in ready cash, it is surprising to me just how few small businesses make ready and steady cash flow a priority.

The fact is, cash flow is the oxygen of your business. It allows you to breathe, and the lack of it strangles your business. Cash flow allows you to make decisions based on smarts, not fear. It helps you build good credit. Ample cash flow means bills paid on time, easy payroll, and better sleep.

Increasing your cash flow then is a good and smart New Year's business resolution. Here are a few ways to do it:

Get paid: Far too many small businesses allow unpaid invoices to accumulate and grow old, waiting (or hoping) that they will get paid someday or some way. Buck up! If you have outstanding invoices, call them in.

And once you become current, adopt a new policy and let all of your clients know about it: All invoices are due upon receipt, and invoices that are unpaid within 30 days will incur a penalty, and interest. This is an easy way to increase your cash flow.

Avoid deadbeat customers: It may also behoove you to tighten your credit policy in order to weed out customers who do not pay, or pay late.

Have a recurring sale: There are many reasons to have a sale – to get people in the door, get noticed, to get rid of excess inventory, and yes, to increase cash flow. Sales work. As sales increase traffic, they therefore up your cash flow.

Partner-up: There are essentially three ways to increase cash flow:

  1. Make more money
  2. Decrease overhead
  3. Borrow

By finding compatible businesses to enter into joint venture projects with, you simultaneously make more money while also spending less. That's a win-win.

Reduce other overhead:  Review your insurance policies, phone plans, and health care plans, especially if you have not done so recently. Finding fat here can really lower the bottom line and increase ready capital. Maybe less expensive digs even makes sense.

Get a line of credit: There is nothing wrong with borrowing the cash you need to run your business smoothly; large businesses make it a regular practice. The secret is to not borrow too much and to have a plan to pay it back on time, in full, and soon (if so required).

Increase your fees or prices: Sure, you may lose a few customers, but remember, people make their decisions regarding where to buy and who to hire based upon a lot more than price alone. Increased prices means more money, usually.

Cut labor costs: If you can legitimately have an employee become an independent contractor, and it does not hurt your business and the employee likes the idea, you may save a lot.

Get rid of extra inventory: A sale is one way to make quick cash by ridding your business of inventory that does not sell. It also frees up valuable space for products that can sell better.

Another way to get rid of excess inventory is to simply ask the distributor from whom you bought the product to buy it all back. While they will charge you an administrative fee to do so, it frees up capital and space.

Use the 80/20 Rule: The 80/20 Rule states that 80% of your profit comes from 20% of your products (or in the case of a service business, efforts). Crunch some numbers and figure out which of your efforts and products are the most productive and profitable, and then focus more on those. By the same token, figure out, too, which are the dogs, and send them to the pound.

Having enough money to run your business comfortably makes everything run more smoothly, and some simple changes should do that.

Today's tip:  Some of the suggestions in today's column come from the very useful book, The Small Business Book of Lists, edited by Gene Marks, and which I contributed to as well. The book is full of thousands of other great ideas.

© 2010 Steven D. Strauss, www.MrAllBiz.com