Question:
I was wondering if you could help me increase my cash flow? My business makes a fine profit every year, but the bulk of our sales come during Christmas and summer. The rest of the year, business is slow and it is difficult to pay bills on time then.
Answer:
Your point is an important one: profit is not the same as cash flow. I like to think of cash as the oxygen of a business – have enough and you breathe comfortably, but lack it and you choke. Or worse, die.
Here is one way to understand the difference between cash flow and profit: If you buy something for $2,500 and sell it for $5,000, you doubled your money and made a sweet profit. But if the person who bought that item for $5,000 does not pay you for 90 days, your cash flow will suffer greatly. That’s the difference.
So cash is king, and here then are five ways to increase your cash flow:
1. Cut back: Cash flow consists of two things – money coming in and money going out. It is the money you make and the money you spend. As such, obviously, one way to increase your cash flow is to spend less. You could, for instance:
- Reduce your rent: Vacancy rates in commercial areas are still high. Your landlord may be more amenable to a re-negotiated rent than you realize. And if he or she is not, then a different landlord is sure to want your business.
- Lease instead of buy: Purchasing large items means a lot of money goes out at once, and that hurts cash flow. Leasing autos and computers means that you pay less up front (though probably more overall), and an added bonus is that your lease payments are tax-deductible expenses.
2. Increase sales: Anyone who has read my column for a while knows that I love the idea of multiple profit centers. It is the solution to many a business problem. Have a seasonal business? Create another profit center.
Example: Starbucks used to just sell hot coffee. The problem with that is that it too is a seasonal business – coffee sales go down in the summer. So Starbucks created additional profit centers – slushy Frappuccino, CDs, food, etc. By having more ways to make money than just hot coffee sales, Starbucks created steady cash flow.
3. Give yourself a raise: When was the last time you raised your prices? Many small business people are afraid to because they worry that it will cost them business, but that is probably not a legitimate fear.
Think about it: Why do you shop where you do? Sure, cost is part of the equation, but only part. Unless you are the “low cost leader”, being the cheapest is probably not a good strategy for you. If you are in fact worried about customer reaction, the thing to do is to explain your price increase to your people. Let them know you have not raised your prices in a few years but that times being what they are, you need to, and you hope they understand. They will.
4. Invoice the right way: Make sure you send out your invoices on time and don’t let them fall more than 30 days past due. Also, give people an incentive for paying early (say, a two percent discount), and a disincentive for paying late (a 10 percent penalty).
5. Accept electronic payments: My favorite pizza place only takes cash and checks. If their pizza was not so darn good, I would go elsewhere because like many people today, I rarely carry a checkbook and always having cash when I go there is a hassle. It would be better (for me and them) if they accepted credit and debit cards. Other businesses should also consider electronic fund transfers. Electronic payments get money in your account securely and faster. They also reduce the risk of non-payment or late payments.
So yes, profit is nice, but cash is king.