Wednesday, February 24, 2016

What do small business owners struggle with : How to deal with cash flow Part 2

We are working our way through a list of things small business owners struggle with the most.  Last week we talked about how cash flow can be a struggle and this week we are going to talk about specific things you can do to improve the cash flow for your business.

The key elements to cash flow are inflows and outflows: Inflows can occur as follows: sales=cash or sales=accounts receivable, collecting accounts receivable=cash.  Borrowing money from the bank either in a loan or a draw on a line of credit=cash. Putting your own money into the business, either as a loan or as equity=cash. Selling assets you don't need (equipment)=cash. 

Outflows occur when you are spending money: make a loan payment or pay down your line of credit=money out the door. Buying inventory=money out the door.  Buying equipment=money out the door.  Paying employees and other bills=money out the door.  Taking a draw for yourself=money out the door.

How can you impact your cash flow?  Increasing sales will bring more money in the door.  Collecting your accounts receivable faster will bring money in the door faster.  Having a line of credit to pay for inventory will slow the pace of money going out the door.  Getting terms from your suppliers or the equipment vendor will also slow the pace of money going out the door.  

A great way to control cash flow is to try and match the terms you get from your suppliers with the terms you offer your customers.  If your suppliers give you 30 days to pay for your inventory, then you can offer 30 days to your customers.  If your suppliers give you 15 days, you don't want to give your customers 30 days unless you have a line of credit to cover the gap.When you are considering buying new equipment, think about the impact on your cash flow.  Even if you get a loan to pay for it or the vendor gives you terms, you will still have money going out the door at some point so you want to make sure the new equipment will somehow generate some money coming in the door: will you make more sales because of the purchase?  Will your costs (labor?) go down because of the purchase? Will the quality of your product improve so you can raise prices which will bring more money in the door?

Many entrepreneurs focus simply on profits and that can be a real issue if the business has inventory or accounts receivable or a long manufacturing process.  Mapping out the pace with which money comes in and money goes out is the secret to success for a small business. 

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