Looking good on paper financially while having poor cash flow is a common problem among business owners. This is especially true of startups and those operating on a limited budget. When determining the source of the cash flow problem, it often comes back to ongoing issues with accounts receivable management, debt management, and inventory control. Below are some tips for how to improve each of these areas.
Accounts Receivable Management
It doesn’t take long in business to learn that having your customers owe you money and actually collecting it are two very different things. If your customers tend to pay late, it may be due to an impression that you are lax about money because you take a long time to send invoices. Correcting this problem and invoicing right away can help you get your money sooner.
Another potential problem is that your customers aren’t clear on your payment terms. Before sending an invoice, make sure to include your terms in at least two prominent places. You don’t want the customer to have to hunt for contact information if he or she has a question, so be sure that is in a prominent place as well. To keep good customers paying on time, consider offering them a small incentive that also lets them know you appreciate their business.
Debt Management
Understanding how you took on too much debt is essential before you can get yourself out of it. Take the time to look at your spending and determine how often you pay cash versus how often you use a business line of credit or credit card. These types of accounts can have extremely high interest rates that can make them challenging to ever pay in full.
If you must carry business debt, consider consolidating what you already have with a small business loan. These often have much lower interest rates and more favorable payment terms. Another possibility is to sell assets your business can do without to attempt to lower your overall debt. Be sure to seek advice from a financial advisor or small business accountant with our company if you have accounts in collection or you’re considering bankruptcy.
Inventory Control
Once you purchase inventory, there is nothing you can do but wait for it to sell. The more you buy, the less cash flow you have available for other purposes. You also need to consider that you could end up taking a substantial loss on the inventory if you’re unable to sell it at your preferred cost.
If you’re not yet familiar with the 80/20 principle of inventory management, it means that the top 20 percent of your stock typically makes up about 80 percent of sales. Having an excellent supply chain management partnership in place will aid you in making better choices regarding inventory you should purchase or bypass. Try not to accumulate any excess inventory and make sure you only purchase items with a proven history of having a positive rate of return.
Need more business financial tips? Doerhoff & Associates knows you can use all the help you can get to run your small business successfully, and we are here for you. We strive to provide what you really want and need – a unique and customized set of services to fill the gap and support you, the business owner. Please contact us if we can provide you with further direction on this or any other small business accounting topic.
