Cash Is King back to blog
Cash is King.
We have all heard this statement before but nowhere does it apply more than in a small business. You can have the most profitable business in the world and if you don’t have enough cash flow to pay your bills you are very quickly out of business.
The big question business owners often ask is “How can a business be profitable and at the same time run out of cash?” The answer is simple yet complex.
Things to keep in mind:
There are those bills in a business that take money out of the checking account and don’t create an immediate expense. Some of these are principal loan payments, equipment purchases, inventory purchases, distributions out to owners, life insurance premiums paid by the business, pay down of accounts payable, estimated tax payments, sales tax payments, etc.
There are also things that increase your income but do not create immediate cash. For example, an increase in accounts receivable, taking a promissory note from a customer, and providing product and/or services now but you’re taking payments over a period of months.
I have even seen many cases where the client’s sales really start to take off… the accounts receivable gets bigger, the client purchases more inventory, and then they need to invest in some new equipment to handle the new growth. Next thing you know, your new and exciting business just ran out of cash and you can’t meet payroll.
So, how do you make sure that your small business always has an appropriate cash flow? Here are 6 things that can help immediately:
1. Deposit cash balances in interest earning accounts – Something I frequently notice is businesses with large cash balances in their interest-free checking account. Take advantage of that balance by moving excess cash into a savings account that will earn interest. Over time that interest can earn a significant amount of money for your business.
2. Sell or retire excess and obsolete equipment or inventory – Many times businesses have inventory that isn’t moving or they hold on to older, unused equipment. Sell that stuff! Earn some extra cash by selling it on eBay, a social media buy/sell/trade group, or simply put up a sale sign in your store.
3. Require deposits on large or custom orders – Congratulations! Your business just got that order of a lifetime. Keep in mind that you have to pay for extra supplies before you collect that check. Go ahead and collect some money in advance.
4. Stage payments on long-term contracts – Home builders do this the best! They tell buyers up front how much money is needed to complete each phase of a project. You can do the same to ensure your cash flow keeps flowing.
5. Offer discounts for quick payments – This is an oldie but goody. Encourage customers to pay faster by offering a 2% discount if they pay within 10 days.
6. Send old accounts to a collection agency – You cannot believe how many times I have encouraged clients to send old accounts on to a collection agency. A common response is, “If I send them to a collection agency I will only get 50%.” Isn’t 50% received better than receiving nothing?
These are just a few ideas to help increase the cash flow of your business. If you would like more ideas, or a free business review please feel free to contact my office.
NOTE: This information should not be considered as tax/legal advice. You should consult your tax/legal advisor regarding your own tax/legal situation.