Cash is king. Accountants know it; every business should accept it. Entrepreneurship is not about how much popularity you get, or how much inventory you can shell out every minute. It’s all about how much cash you have at the end of the day.
Cash is like drinking water to businesses. It needs it to survive but keeping it all in would mean certain death. The flow of money in and out a company determines how efficient it is in managing its income and expenses. Cash flow is so crucial that accountants make a whole separate report on it at the end of every period.
Hence, if you want your business to succeed, you should start paying more attention to how your cash is being used. Listed below are some effective ways on how to improve the stream of cash in your business.
Pay On Installment Basis
Many businesses think that purchasing their equipment, machinery, and other assets outright mean savings for their company. A brief computation of buying a machine long term over buying on full seems cheaper because lenders often place n interest on the installment payment of buyers.
However, if you look at your money with a bigger perspective, holding on to your cash is the smarter choice. Although you will incur interest expenses, having the opportunity to hold on to more money means the ability to invest in other income generating ventures.
For example, you plan to buy a car worth $5,000. The sales agent offers you two choices; either pay it in cash or pay $550 every month for ten months. A quick look would tell you that it would be smarter to buy it immediately and save $500 in the process.
However, what if you could invest your money in a business that can double your money in ten months? That would mean that you had a net income of $4,500 over the installment period.
Increase Your Receivable Turnover
Having receivables is part of every business. It stimulates sale at it can make it easier for customers to purchase your product. However, having too much of it can also cripple your business operation. Unless you can find a supplier willing to accept IOUs from your customers, you better fasten your receivable turnover.
One easy way to do this is to offer sales discounts. Sales discounts are incentives that businesses like yours can give customers for paying early. Although your revenue may become smaller, it’ll be easier for you to have enough cash to invest in other dealings.
Make Sure To Lend Only To Those Who Can Pay
As I have mentioned above, too many receivables can hurt your business pretty bad. However, the only thing worse than a customer hasn’t paid is a customer that cannot pay. It is tempting to allow as many willing customers as possible to buy your product on credit. However, you need set up a system that can differentiate customers that can pay you later to those that cannot.
Manage Your Inventory
Inventories are the source of income of retailers. It is the reason why a business exists and why customers approach it. However, unsold stockpiles are also idle assets that have no current benefit to the business. Hence, the Japanese company Toyota created the Just-In-Time method to solve this problem.
The Just-In-Time method or JIT for short is an inventory system wherein a company maintains the smallest amount of inventory possible without crippling the business. To do this, you must study how your business flows and determine the optimal repurchase point. This way you only need to refill your inventories when you expect customers to buy them.
Have A Healthy Relationship With Your Supplier
By healthy relationship, I don’t mean that you should date your supplier’s secretary. Maintaining a healthy relationship with your supplier means having a good credit history with them. Businesses who often pay their suppliers on time can easily acquire discounts that can help them save money.
Furthermore, by having a good credit standing, you have a higher chance of being allowed to buy on credit. This means you can have more liquid cash that you can invest in other areas of your business.
Rev Up Those Prices
Most businesses are afraid to increase the price of their products and companies. The reason for this is that they are worried that their customers might shy away and move to their competitors. However, that is not all bad as long as you do it correctly and will proper planning.
Imagine a business selling 1000 shirts a month worth $2 for $4 each. That would mean that they have total revenue of $4,000 and net income of $2,000 monthly. Now imagine them raising their price to $8 per shirt. Let’s assume that their sales drop by has because of that decision.
Sounds bad, right? However, if we recomputed their revenue, we will find out that it remained at $4,000 per month. This means that although they lost some customers, they did not lose any revenue. What’s even better is that, since it was only the selling price that increased and not the cost, their net income went up to $6,000 per month!
Nevertheless, it is foolish to think that increasing your price will always result in higher earnings. Make sure to have an in-depth study of your market and the current market before making such a move.