Is Your Business Cash Flow Low? Five Ways to Increase Cash Flow
What do you do when you’re business cash flow is low and you don’t have a working capital line of credit to ease the stress? To find cash for your business, consider doing the following:
- If your small business employs direct salespeople, make sure their commission structure is properly set up. First, you should only pay salespeople their commissions once payment has come in. So salespeople, who have the relationship with your customers and are sometimes loathe to jeopardize this by pursuing collections, are motivated to follow up with their customers to ensure payment was made. For example, if the customer has terms to pay in 15 days, state that commissions will be paid on the 20th or 25th day and ONLY if the customer paid. Second, you should either set maximum discount rates or make sure that commissions are tied to the gross margin on the product or service sold. If you tie commission to gross revenues, you could end up only breaking even or worse, losing money, on each sale. By basing commission on gross margins or, even better, having a sliding scale with a higher commission paid for higher gross margins, you ensure you make money with each sale.
o There should be a time limit on the customer payment. If the customer hasn’t paid within 90 days, the commission should be voided. Pursuing collection of unpaid invoices costs your customer money. You should not pay for your salesperson’s judgment errors. If the customer doesn’t pay, you don’t pay the commission, thus saving your cash and maintaining your cash flow.
- If you pay salespeople a base salary and a commission but the business has dropped off and you must reduce sales staff, you can utilize manufacturer representatives to sell your product in the interim if your company is a distributor or manufacturer. Most manufacturer representatives work solely on commissions. When business picks up, you may still wish to continue use of these representatives to broaden your geographic reach.
- If you own a small business (or larger business) that has more than one location, determine how much income each location generates. If one or two locations generate 70-80% of your business, strongly consider closing the other locations. You will save the overhead costs for that location (rent, utilities, etc.). If you really believe you need that location despite the fact that you are not obtaining much business from it, consider establishing a mobile venue or partnering with another business that has a location near the one that you may close. You may be able to make use of their office on an occasional basis or rent a small area in their warehouse – whatever your company needs. Saving on overhead helps you convert more of your costs from fixed to variable. Variable costs are much easier to manage than fixed costs, especially when cash is tight. This strategy immediately impacts cash flow and increases your working capital.
- If you keep inventory, make sure what is primarily stocked in your inventory is what is actually selling. Inventory takes up space that you can make better use of if there is no turnover of that inventory. Most products have a shelf life. Therefore, if portions of your inventory are not moving and the lack of movement is not due to poor marketing or selling on your part but due to a drastic drop in demand for those items, sell them at a deep discount to clear the inventory out.
These are a few of the operational improvements a small business can make to immediately improve cash flow and increase available working capital.
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Tiffany Wright is the author of the ebook, “Help! I Need Money for My Business Now!” available at http://www.smallbusinessfinancingresource.com . She is the president of Toca Family Business Services, an interim management firm, based in Atlanta. As a former CFO and business advisor, she’s helped companies obtain over $31 Million in financing. She has an MBA in Finance and Entrepreneurial Management from the Wharton School of Business at the Univ. of Pennsylvania and her B.S. in Engineering. You can also view her blog at http://blog.smallbusinessgrowthcapital.com .
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