Cash Flow Solutions for Your Bottom Line

This article originally appeared on the OPEN App Center.  Visit www.theopenappcenter.com for more information and resources for streamlining and growing your business.

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Cash flow is the ebb and flow of money in and out of your business, whether you have the cash on hand to pay your employees, vendors and other bills as they come due (not whether you have money owed by clients or customers some time in the future). The following cash flow solutions can help get a better handle on your cash flow — and become more profitable.

Understand Your Cash Flow

Determine your money-in, money-out cycle. What is it that you do to bring money in? Do you sell goods or services? Do you also reap returns from investments? Are you getting any payback on loans you’ve made to others?

Whether your cash flows out by check, ACH transfer or international wire transfer, you must track where your money goes, which can be via four main exits:

• Paying expenses, including salaries and benefits for employees, overhead like rent and utilities, taxes, marketing costs and insurance.
• Investing in assets, such as buying equipment or other capital items needed for the business.
• Paying owners, including dividends to shareholders and draws to owners who are not employees (e.g., owners of limited liability companies).
• Servicing debt, such as paying interest and repaying principal on amounts that the business has borrowed.

Note that not everything you pay out, which represents a drain on your cash flow, is a deductible business expense. For example, payments of an owner’s draw and repayment of principal on loans (including credit card debt), use up cash flow but do not contribute in a tax-deductible way to your bottom line.

Monitor Your Cash Flow

Every business has its own cash flow cycle. For example, for a manufacturer, the cycle can run from the time that materials are purchased to make goods until the collection of receivables for goods sold; it could be many months from start to finish.

Track all money going out in your cycle to determine whether you are keeping enough cash on hand to pay necessary expenses. Monitor your cash flow by working closely with your accountant or by using cash flow tools. Your accounting software probably has tools for this purpose. Also, SCORE has a cash flow template that you can use to project your cash flow over the next 12 months (you have to register with SCORE, but this is free).

Improve Your Cash Flow

If you are having difficulty paying your bills on time, you’ll need to improve your cash flow. There are only two ways to do this, increase incoming cash and reduce outgoing cash.

Increase incoming cash by:

• Boosting sales. Use promotions, including discounts, to stimulate sales activities.
• Raising prices. Even though these are not the best of times, many companies are finding it necessary to raise prices to cover increased costs of health care, fuel and other rising expenses.
• Improving the collection of your outstanding accounts receivable for sales you’ve already made. Simplify payment methods for customers by enabling them to make ACH transfers or international wire transfers from their bank accounts. Create a collections policy so that receivables don’t age without your taking action.
• Changing your credit policies to obtain immediate payment rather than financing sales. For example, rather than becoming a banker for your customers and clients by invoicing for completed sales and then waiting to be paid, get paid immediately via check, credit card, or electronic payment.
• Borrowing money. Using a line of credit, tapping into a cash advance on a credit card or borrowing from suppliers can help with an immediate cash crunch, but in the long-run will cost you money in financing charges. Another way to raise cash quickly is to use factoring for your accounts receivable.

Reduce your cash drain by:

• Cutting expenses. Except for fixed costs like rent look for any way to reduce every cost you have. Shop around to obtain the best premiums for insurance. Monitor travel costs to keep them in check.
• Reducing inventory. It costs money to carry inventory, so the less you keep on your shelves, the less money you’ll need to devote for this purpose. But make sure you have sufficient inventory to meet customer needs.
• Delaying payments. When bills come in, you can pay them at the last minute to keep your coins as long as possible. Pay via electronic transfers to maximize this strategy. Don’t, however, pay bills past due; this can hurt your credit rating and make it more expensive for your company to borrow money in the future.
• Bartering for the things your business needs. You can swap your services, for example, for goods or services, and no cash is involved in these trades, other than sales tax where applicable. Rule of thumb: Limit bartering to 5 percent to 15 percent of your revenues.

Remember the old adage that “cash is king.” Just because you are ringing up sales does not automatically mean your cash flow is sufficient to cover your obligations. By implementing these cash flow solutions, you can stay on top of the money coming in and going out your door.