All businesses are in the business of improving cash flow. That's how you stay in business, after all.
And while, in a sense, it may be easier to manage your cash flow when your business is making over $1 million, it can be harder, too. There's that whole, "The bigger they are, the harder they fall" storyline.
Keeping that in mind, you may want to pay attention to these three problem areas. Addressing them may helping with improving cash flow.
1. Monitor those profit margins.
Tyler Douthitt is the CEO of TFD Unlimited, a company based just outside of St. Louis, in Fairview Heights, Illinois. It's still arguably in its startup stage—it's been around two years, and there's only one full-time employee, aside from Douthitt—but the company will see about $1.2 million in revenue by the end of 2017.
So far, Douthitt says that he has been able to have about a 50 percent profit margin, which is extremely healthy. It helps that his company sells earbuds, an extremely small product, and that he works with a very reliable manufacturer.
Another profit margin booster? He has been able to avoid renting out a warehouse or leasing a building. Douthitt says he's holding off on that expense “until I know it makes financial sense. I hate wasting money in life and in business."
—Colin Darretta, CEO, WellPath
Many businesses aren't going to get away with a 50-percent profit margin. But what should your profit margin be?
“There is no simple answer to the question of an appropriate profit margin for a firm. It really depends on the firm's pricing, operational and financing strategy," says Ajay Patel, a professor and chair of finance at the Wake Forest University School of Business in Winston-Salem, North Carolina.
He cites Costco, which has a net margin of about 2 percent.
“Is this bad?" Patel asks. "Not necessarily, since they turn their assets over three and a half times a year, allowing them to generate a return on assets of 7 percent, a return on equity of about 20 percent and a return on invested capital of 14 percent."
Then Patel mentions the famed jeweler Tiffany's, which has approximately an 11 percent net margin. Patel says that the company needs to have a higher net margin because it takes them longer to sell their products. Consumers find it easier to make an impulse purchase of a giant tub of margarine whereas they mull over buying diamond rings.
Douthitt says that he would advise any business on a quest to improving cash flow to have at least a 10 percent profit margin, but ideally, 25 percent.
“That gives you more flexibility," he says.
Still, as Patel says, it comes down to your business model. But profitable margins are important for growth, as Patel or any stockholder will tell you.
2. Cut back on waste.
One way any company—whether it's making $50,000 or $1 million or $100 million a year—will improve its cash flow is by cutting its operational costs.
Colin Darretta is a New York City-based serial entrepreneur. He's the founder and CEO of WellPath, a company that offers consumers customized nutritional solutions, and co-founder of DoJoMojo, an online platform that helps its users grow their email list. Both companies make well over $1 million a year, but Darretta says that the companies don't divulge financial information.
Darretta's advice for improving cash flow is to control your costs. (Can't argue with that.) When controlling those costs, drill down deep, he advises. Some of those innocuous costs may be hurting your bottom line the most.
“The one piece of advice I bristle every time I hear is 'Don't sweat the small stuff.' On the contrary, when it comes to building a business it is implicit that you 'sweat the small stuff,'" Darretta says. "Otherwise, you're making yourself a prime candidate for death by a thousand cuts. Every dollar you spend on something that is extraneous, no matter how small, is a dollar you are not spending on real growth drivers of your organization."
Darretta offers up the example of the paper stock WellPath uses in their shipping boxes. After they decided to go with a slightly cheaper version than what they had been using—literally, three cents cheaper—Darretta says the company has been saving a number somewhere in the low five figures annually.
He says the company has also been improving cash flow by cutting back on monthly software subscriptions. Those subscriptions can get pricier the more employees you have using them.
"There is a tendency to buy or subscribe to software, and, as its utility declines, simply keep paying for it due to inertia," Darretta says. "They don't get cancelled soon enough and cost the business significant capital that could otherwise be spent on growth."
3. Find a way to bring in money during the slow months.
Sure, this may be easier said than done. But this is especially important if you're a seasonal business.
The colder months can be an extremely slow and expensive season for Tailor Made Lawns, a local lawn care company in Charlotte, North Carolina.
“Because our sales drop off so heavily in the winter, our biggest struggle has always been paying our bills and making payroll in January," says Damon Millotte, the company's general manager and vice president.
So the company offers a discount for the customers who pre-pay for a year's worth of services.
“We usually try to get around $50,000 to $60,000 to help sustain our revenue while we are technically not generating any new sales," Millotte says. “This is something that's been really helpful."
You might want to make your company's mantra "anything helps" when it comes to cash flow. While pinching pennies to the point of being cheap might make your company's problems worse, watching to see that your profit margins remain healthy (or least that there's some profit margin), cutting waste and doing what you can to make the tough months less so can help with improving cash flow.
Read more articles on cash flow.