The positive amount of cash flow is critical to run a small business efficiently. The cash flow must be positive, it constitutes the difference between the cash in and the cash out. The business profit builds up only if the amount of cash in is greater than the amount of cash out. When the difference is negative, the business struggles, and in order to get cash to survive it will require credit, at an expensive price, the interest. Thus, to increase the business cash flow one can take immediate action with the following five ways.
Your company may use a certain number of days to get paid by its vendors. In any case your business should avoid using cash on delivery or at purchasing to pay the suppliers. If your company is at the beginning and the vendors do not accept terms, it is preferred to put in a deposit, or a credit card and negotiate terms with 30 or more days to pay back. Do not to use the credit card at every transaction because you cannot control the cash flow. The only way you can use the credit card regularly at every transaction is when the product margin is high, so that the business profit made is high enough and you do not need to worry about paying for the supplier materials when the credit card bill arrives.
In case the company has preset payment terms with the vendors, but still the cash flow is an issue, negotiate with the suppliers to pay in installments. Prearrange to pay off, but change the due date further into the future, to allow the cash to flow in. That way more cash comes in faster than it goes out, so there is business cash flow available to run your company.
Here are a few ways to increase your product margins: keep a continuous and valued relationship with your suppliers so that they give you value-added products for the same price. When a vendor terminates a product line and you cannot get that product, look at the distribution channels who will give you both cheaper products and value and then your product costs run comparatively less than before.
Customer Terms and Average Sale
Nowadays, the best if you ask the customers to pay with credit card, in small sales, that way the cash gets into your business account in 2-3 days depending on the credit card. When the business requires terms of payment from the customer, for instance 30 days, propose to them to pay in 10 days or less for a discount or even pay on delivery for a higher discount for example 2%-5% or more.
In order to apply a comfortable discount, the product margin needs to be considerable, and consequently the amount collected per sale needs to be higher. A higher amount per sale means products or existing products bundled together sold at higher value. A greater average amount for each sale represents more cash coming in when all else remains the same: percentage of expenses, overhead and profit. It means increase of positive business cash flow.
The cost of maintaining the employees can be controlled by decreasing the employees’ overhead costs. For instance, let us assume there are seven employees working at the office and their continuous presence is not required every day at the work place. They can also work from home, the management or ownership of the company can ask them to come to the work place on certain days and the rest to perform the same activities as they would be at work, but from home.
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The employees rotate on which days to come to the office. The infrastructure provided for the employees to complete the tasks at home costs considerably less than providing it at the office. It reduces the overhead costs, the management can keep five operational desks instead of seven.
Conversion rate refers to how many contacted qualified leads are converted to active customers. Since the sales people work the leads to convert them to customers, for the same effort they can convert more to active customers. The resources they use are the same, but the results are different, they reflect more revenues in the balance sheet. The increase in the company revenues represents an increase in the cash coming in, and the cash flow builds up on the positive side making profit.