Cash Flow is an essential ingredient to the survival of your small business. It is the flow of money in and out of your business, and the quantity as well as timing of that flow is critical to the continued operation of your business.
Cash helps your business purchase material it needs for production and services thereby helping your business to generate more cash for its operation. If customers are slow to pay or your pricing structure does not adequately cover the cost of production, your business will not have enough cash to continue operation. Even if your business is turning in a profit, you can still be forced to close if your business runs out of cash.
Here are a few common problems to watch for:
1. Manage your receivables
Try to turn your receivables quickly without antagonizing customers. Advise key customers what you’re up against, and arrange more favorable terms if it will expedite payment. This will create cash that can be reinvested in the business.
2. Weakening Sales
Sales are the heart of your cash flow. The persistent lack of sales can affect how your cash is coming in to your business and weaken liquidity.
3. Excess Inventories
Inventory greatly impacts cash flow, too much inventory is as dangerous as not enough, since money tied up in inventory can severely hamper a small company’s cash flow.
4. Manage Staffing
Ensure new employee hiring is necessary. Employee salaries are a significant cash drain so efforts to maximize productivity from current employees are paramount.
5. Protect working capital.
If cash is tight don’t pay for long term investments in equipment. It is better to use debt to finance these projects. Debt can be used to re-finance fixed assets to free up capital.
These are just a few suggestions to improve that most vital business tool – cash flow.
I hope you agree, please let me have your comments. gerry@polarisgroupmc.com
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