7 Business Operation Hacks That Will Improve Your Cash Flow
Let me ask you a simple business profitability quiz…
If you operate a food truck with $100 in supplies each day, with sell out revenue of $375, how much profits will you make today if you sell out everyday and the daily operating expenses is fixed at $75?
You only earned $100 because you need to spend $100 out of that $200 for supplies the next day.
This also means that if $175 out of your sales of $375 is made with credit cards, you are basically screwed and your cash flow the next day will run into negative territory. You won’t even last a third day unless you have some handy working capital hidden somewhere.
This simplified example is a demonstration of how cash flow can affect business operations, including it’s profitability.
Cash flow is not just a savvy jargon that business people use just to appear sophisticated to onlookers. It is the very life blood of a business. Even highly profitable businesses can be forced to file for bankruptcy if they don’t put enough focus on keeping cash flow positive.
And this is also why you want to use the following operating cash flow procedures as a guide when implementing your own systems for you business.
Remember. It’s not just about collecting your receivables faster. It’s also about paying your payables slower.
1) Get paid with cash upfront
You can see how critical retail businesses view this when they often offer extra discounts or rebates when customers choose to pay by cash.
Essentially, this action translates to a retailer viewing cash flow as more important than profit margins.
This can be challenging for many businesses especially if you are accepting payments online.
But depending on the nature of your business, if it is possible, always request for upfront payments in cash.
2) Never pay your bills early
There’s nothing wrong with delaying your payments until the due date. It’s not a sign of financial trouble and not the same as late payments.
Late payments can incur interest fees and penalty charges depending on the trading terms you have signed in the agreement with your vendors. Those are just extra expenses that should never see the light of day in your income statements.
You don’t need to impress anyone by paying early.
In fact, the longer you delay them, the more it will look like your suppliers financing your business. This is like free financing without the heavy breathe of the bank breathing down your neck.
Maybe this is why sometimes, suppliers encourage their customers to pay early by giving discounts for early payment. They are trying to reverse the situation on you and let you finance them instead!
3) Encourage early payments
As mentioned in the above point, you can often improve the collection time by offering discounts for early payments.
Your bottom line might take a hit. But your will alleviate the stress on your working capital.
For B2B customers, numbers can often be a sensitive factor that triggers action. So even a 1% discount for payment within 7 days can be a proposition attractive enough for businesses to pay promptly.
You can also apply this concept in the area of sales.
For many types of products and services, consumers expect coupons and discounts to spruce up the longer they wait to purchase.
You can counter this consumer behavior by offering early bird discounts and promising to prospects that this is the steepest discount that will ever be offered for the specific product.
4) Issue invoices as quickly as possible
In my previous corporate career in procurement, I was sometimes stumped on how long it takes for a vendor to issue an invoice weeks after the products or services were delivered. I can only think that the staff doing these tasks have spared no thought for their bosses.
That is not going to be you.
Because the sooner you get that noisy dot matrix printer to generate your invoices, the sooner the due dates for payments arrive. And the sooner you can cash in your collections.
Just take note not to make mistakes in the documentation. Because debtors can call you out on mistakes and make late payments based on those pesky typo errors.
It’s a dog-eat-dog world out there, don’t you know?
5) Shorten your billing cycles
Some companies choose to bill their customers on a monthly, quarterly, bi-annually, or even (would you believe it?) yearly basis.
Common sense will tell you that the more often you bill your clients, the more frequent you get paid.
If you don’t practice the habit of immediate billing, start deliberating whether you are able to invoice your customers on a weekly or bi-monthly basis. The longest you should stretch your billing cycle is a month. And that is already pushing it a bit.
An innovative practice that I have observed recently is that companies are segmenting their deliveries into many parts. This allows them to invoice customers as soon as the first delivery is made. This is especially healthy to their cash flow when they usually stagger deliveries and no full delivery is made until the last batch of products arrive.
6) Track receivables religiously
If you have been in business long enough, you will know that bad debts are inevitable. Some people just have a knack of consuming whatever you are selling and fail to pay what is due.
And if you were to dig a little deeper, you will realize that in many of these instances, you were not on-the-ball in chasing them for payment.
The main reason why there were no “chasers” dispatched by you is that you did not keep track of the statuses of those receivables.
Maybe if you had kept track you could have done something about it and caused a more productive outcome.
This is not a tough problem to rectify. You can easily get software these days that does all the tracking for you. Many even come with notification systems that send you alerts when certain trigger points are met. The trigger points will of course, be set by you.
You can be lazy. Just let modern technology do the heavy lifting for you in this area.
7) Keep variable expenses low
It can sound like common sense that you should keep expenses as low as possible. But you will be tempted to splash out when your business starts to grow.
Suddenly you start to feel that you deserve a cutting-edge computer even though you will only be using to check emails. You working desk is suddenly ready to be condemned when it’s not even been a year old. Even your snack bar looks like it is devoid of gourmet when biscuits and 3-in-1 coffee have served you and your employees so well for so long.
You are the best person to judge whether you are spending on needs or wants of your office.
Just be wary not to start your celebratory dances prematurely.