Almost every business owner would like to improve cash flow, but that can seem like a daunting task when your company is growing fast.
After all, if you're expanding locations, buying new inventory and hiring additional employees, you could argue that this may not be the time to improve cash flow. You may think that now is the time to hang on, be glad you have any money and hope you survive.
But that might not be the most helpful approach. A 2017 Fifth Third Bank survey of 505 adults working full-time at private organizations with less than $10 million in revenue showed that 32 percent of business owners report a lack of funds as an obstacle for growing their business. So if you're growing without trying to improve cash flow, you may have a business you can't afford to operate one day.
Improving cash flow while your company works on becoming bigger and better than ever may help continue your growth trajectory.
There's no shortage of ways you can improve cash flow, such as bringing in new investors, taking out loans, applying for lines of credit or utilizing accounts receivable factoring. But if you've tried one or more of those strategies and are looking for something else, you may want to consider these tips.
1. Communicate with your creditors.
If you're owed money that hasn't come in yet, you probably owe other people money. Patrick West feels your pain. He is the founder and CEO of Be The Machine, an experiential marketing agency that produces consumer experiences for big-name brands. He opened his New York City-based business in 2015.
“I didn't have cash flow problems in Year One, but now in Year Three, the problems have become pronounced,” West says. “Simply put, doubling revenues means doubling costs but without double the time to handle the workload.”
It also hasn't helped matters that a lot of clients and agencies, he says, have moved from 30-day payment terms to 60 and 90 days, an unfortunate trend that has been around for a few years now.
West and his two partners use business credit cards to help stretch the company's revenue, and he has secured a healthy line of credit with his bank. But it also helps to simply talk to the vendors, suppliers or whomever you owe money to discuss if they're okay with being paid when you get paid. Some business owners might accommodate you.
“Communication is key to maintaining strong vendor relationships when their payments have to be delayed,” West says.
Communication won't always get you far, West concedes. Sometimes suppliers won't bend, and he has to fork money over even if his company hasn't been paid. But he says that some suppliers have been willing to take some partial payments and receive the rest once West's clients pay him. The key thing to remember is to communicate regularly if your delayed income is going to delay you paying someone else.
“People hate being left in the dark,” West says, adding that he doesn't like when others do that to him either.
2. Adjust your pricing to help improve cash flow.
If you're always having cash-flow problems, maybe your prices are too low.
Bradley Shaw, owns an SEO company, SEO Expert Brad in Addison, Texas, which has been in business since 1997. Shaw, who has four full-time employees and four virtual assistants, says that about 18 months ago, his company went through a growth spurt. Shaw was spending more money on employees, and rebuilding his internal software systems for client management and task automation. He was also spending a lot on online advertising and he moved the business into a new office. (“It was becoming hard to have higher-end clients meeting us in a cheap office space on the wrong side of the tracks,” Shaw says.)
With all of those commitments, it's not surprising that Shaw's company had some cash-flow problems. To counter that, he raised his prices. By 25 percent.
Making that decision wasn't easy, he says. “Online marketing is very competitive with many overseas companies bombarding clients with unrealistic cheap pricing and false promises. This was a concern before we raised our prices,” he says.
But Shaw hadn't raised his prices in years and knew his clients were getting a high return on investment with their business. Indeed, he says that when he raised prices during his clients' contract renewals, nobody flinched.
“Twenty-five percent wasn't a big increase for them,” he says. But for his business, “it sure helped our cash flow. Looking back, I wish we had done it sooner as the extra income has enabled us to grow as well as provide an even better service to our clients.”
Shaw also offered a 10 percent discount for prepaying contracts, instead of paying monthly.
“Twenty percent of our clients took us up on this offer," he says. "This was a welcome instant cash injection."
3. Look for problems that have nothing or little to do with cash flow.
Keep in mind that your cash-flow troubles may be related to glitches in how your company collects its cash.
For instance, Greg Cruikshank, founder and CEO of LabRoots, a nine-year-old social networking website for scientists and science lovers, says making deals but taking too long to sign the contract won't help your cash flow. Same goes for not looking ahead to see how your revenue may change in the coming months.
“Two things we focus on to manage cash flow are closing contracts and forecasting with accuracy,” he says.
Or maybe your company's problems have nothing to do with how you invoice or collect your revenue. Maybe your business model is a little flawed. Serena Lan, director of communications at Tallyfy, a workflow management software company with offices in St. Louis and Mountain View, California, says that her company almost ran out of cash seven months ago. So Tallyfy began doing consulting work to supplement the income it received from its monthly subscription payment business model.
“We generated $600,000 in revenue, which saw us through a dip in cash flow,” Lan says.
The lesson they came away with that may help—at least in theory—improve cash flow for other companies?
“I believe," Lan says, "that businesses need to shift their focus away from cash flows—and toward the operations and procedures that lead to cash inflows and outflows.”
Photo: Getty Images
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