Cash Flow Clogged Up? Set Some Money Free!
Question… are your supplier and customer payments clogging up your cash flow? If so, it’s time to set the money free.
Consider this universal truth of business: Cash is king. It doesn’t matter how profit forecasts look or what’s trending in your particular industry, because without the cash, business just doesn’t happen: rent isn’t paid, inventory can’t be bought, and employees don’t get their paychecks. So even an order of 10,000 widgets that could make you a bizzillionaire means nothing without the cash to produce, stock, or sell those widgets.
How can you make sure you always have enough cash to take advantage of the market? It’s all about understanding the ebb and flow of cash in your business. It’s great to focus on how much money you could make or how amazing your business model is, but let’s set profit margins aside for a minute and take a look at your bank statement. It’s time to unclog.
Accounts receivable (A/R) and accounts payable (A/P) may be more or less important to you depending on how involved you are in the accounting process, if you manufacture your own products, and how the business is financed. However, one thing is for sure: You must be knowledgeable about who owes you money and who you’re in debt to. Think of A/R as a tributary constantly flowing into cash flow, while A/P is a large dam, redirecting your cash elsewhere.
As a retailer, you might account for with A/R if you sell your products to other stores or if you deal with large customer purchases. Some businesses like allowing customers to pay overtime at interest rate because it can generate more profit and build a constant revenue stream to help stay afloat during periods of low sales or seasonal lulls. The logic is, “If you don’t need a large payment right now, why not wait and get even more money in the long-term?”
Offering financing can be a serious hassle. If you don’t have a system in place for recording buyers and their credit lines, speak with an accountant or use a third party agency. Without proper management, all the money you’re expecting to receive from financed orders might default instead of ending up in your bank account.
Taking on Debt
Effectively managing loans can be equally beneficial to increase cash flow, but mismanagement can be even more catastrophic. Many business owners have acquired long-term loans through banks, investors, or even friends and family in order to start or maintain their operations. Long-term debt shouldn’t be scary; it can free up cash to use for big projects so you don’t have to save up for years. For example, Sally calculates that if she expands her storefront by 200 square feet, she could earn 20% more revenue a month. If she can get a relatively low-interest loan now, Sally could be raking in more profits immediately instead of waiting to save. Many business owners feel that money sitting in a bank account is money wasted, because it could be invested or pumped back into the business.
While some savvy store owners can hustle with a low cash balance while continuing to conduct business, it can be risky. Let’s continue to use Sally as our A/P example. She expands her business by taking out a long-term loan and also starts to pay off her debt. Her profits increased a steady 5% within 3 months after the work was completed. However, three years later, her products aren’t as unique anymore and her store-front’s traffic drops. Sally is still paying her loan, but she was counting on her increasing revenue to cover it. The combination of the payment and her low cash balance may paralyze, preventing her from adapting to the new business environment.
Monitoring Your Accounts Payable
With long-term debt, business owners can often prepare for peaks and valleys in cash flow, surviving low periods by saving during high ones, but many businesses (especially re-sellers) neglect to take advantage of Accounts payable or A/P. Accounts payable are bills or debt that are due in the short-term usually with-in a few months. Managing A/P allows retailers to benefit from trends or seasonal buying.
Consider the story of Pete.
Pete’s crafts store always gets busier over the holiday season. His customers come to him for decorations and gifts. Pete thought he could take advantage of this by selling Christmas trees in his parking lot but, can’t fulfill the demand for trees without taking a serious hit to his cash balance. If Pete can find a Christmas tree wholesaler willing to sell him some trees and delay payment until January for a high cost, Pete could provide for more value to his customers, make more money, and feel more comfortable with cash in the bank.
This is the ideal scenario. Pete understands his market, he has a vendor that will give him a deal, and he’s well aware of the risks involved. Some guides will recommend standard cash balance percentages and A/P for certain sized businesses, but ultimately, as the expert on your store in your city, you’ll have to decide what you’re comfortable with and how you want to manage the flow of cash between your suppliers, yourself, and your customers.
Need more tips on how to effective manage your cash flow? Check out this handy guide from MyAssetTag: http://www.myassettag.com/cash-flow
Contributed by Alex Roitman, an outreach manager at MyAssetTag.com. After opening a successful retail store in Tucson, AZ, Alex moved to New York, pursuing a career in e-commerce. Friendly and personable, he cultivates relationships throughout the safety and security industries. Alex’s articles spotlight new industry trends and provide tips to give small businesses the tools they need to be successful.