8 Ways to Increase Your Cash Flow in a Cash-Crunched Economy

Every day I hear about cash flow problems from business owners. In this economy, most of us are having cash flow concerns. I am hearing that sales of most small retail businesses are down 10% to 20% from

last year. If you don’t understand the different ways to increase your cash flow, you can get stuck thinking you have no options. If you are having cash flow concerns, chances are it is difficult for you to get a loan  from the bank.

My clients continue to come up with inventive ways to solve their cash flow concerns. I wanted to share some of their stories in the hope it will be helpful to you. I’ve broken these down into 8 ideas to help you increase your cash flow:

1 Create a positive cash flow cycle. The cash flow cycle refers to the difference in timing between when you pay for products or payroll and when you get paid by your clients. A negative cash flow cycle means you pay out before you get paid. A positive cash flow cycle means you get paid before you have to pay out. One client recently asked her vendors for 30 day terms and got it. It put her into a positive cash flow immediately. Other clients have started asking for ½ down before they start the job and some clients offer small incentives for paying accounts receivables early.

2 Increase your average sale. If you can get your customers to buy more of your stuff, for more money, and more often you will increase your average sale. When your average sale goes up more dollars go into your bank account. I have one retail client that started carrying more upscale products, increased her prices on some items, and bundled or packaged some products together. She saw an immediate improvement in her cash flow.

3 Increase your sales and marketing efforts. This is a hard time for building supply companies. One client opened a building supply company just before the real estate market slow down. Oops! So, he took a gamble and advertised on T.V. It was hard to spend the money, but the results are that he has been increasing sales every month since he opened. Another client doubled her sales force and has increased sales every month of the downturn. There really is a lot of opportunity out there.

4 Cut your costs. This one seems like a no brainer, however, many of my clients have been slow to do the difficult cost cutting that is required to stay profitable. One of my clients was very slow to cut costs. We worked together and talked about each expense and explored other ways to get what she needed without spending so much. We found several creative ways to cut costs without hurting productivity or customer service.

5 Reduce or restructure debt payments. The payments you make on business debts, because it is money out of your bank account, are an important area that affects your cash flow. One client talked to their banker, but the banker was reluctant to refinance or restructure the debt. I told this client that the secret was to talk to a bank different from his own. Banks other than yours view gaining your deposit and loans accounts as a big win. Your current bank doesn’t always appreciate your accounts until they are about to lose them. Needless to say, this client did well in lowering their debt payments and received some other nice perks as well.

6 Reduce or eliminate capital expenditures. One business I worked with had a very tight cash flow because she is growing. Growth always creates a drain on cash. She needed equipment and trucks to get the next step. Buying new stuff was out of the question. She started asking people she knew for what she wanted and got the equipment and trucks for almost nothing.

7 Increase the productivity of your staff. I worked with a small business with a tight cash flow that was doing about $800,000 in annual sales but there was very little profit they were just breaking even. We determined through a break even analysis that if we increased sales to $1,000,000 they should add about $100,000 to the bottom line. When they came back the next year they had actually increased their sales to $1,400,000, but there was still no profit. Based on the numbers, our analysis of the situation was that they hadn’t increased the productivity of their staff. When they added new business, their staff costs expanded with their sales. The idea is to find ways for your staff to get more done with less time, energy, effort, or cost.

8 Increase your prices. Increasing price is one of the hardest things for business owners to do. I worked with one owner to research the prices of her competitors. We found that her prices were at least 25% below what her competitors were charging for the same type of products. We experimented with pricing and found that some items actually sold faster when they were priced higher. One business owner increased his prices by just $1. It added an extra $3,000 a month or $36,000 annually to the cash flow. You know that “cash is king.” It is the key to surviving the down times. By working smarter as well has harder you will improve your chances of survival and increase the value of your business. Think of it this way; by improving your cash flow now in this economy, when it bounces back (and it will), you will benefit from improved profitability, productivity, and a positive cash flow.

This article was written by Kirk Davis, an SBDC Certified Business Advisor for the Kent Small Business Development Center, To locate your local SBDC advisor please visit the SBDC web site  www.wsbdc.org/map

The ABCs of Profitability

As a business owner or future entrepreneur, I believe it’s never too early to start thinking about how to make and keep your business profitable. In simple terms, profitability is the amount of sales revenue left over after business costs. Learning to measure profits helps to answer the question, “Are we making enough or going to make enough money for our efforts?”

You, as a business owner, have control over four major areas that affect profitability:

1 Price you charge for your products and/or services.

2 Quantity (or volume) of products and/or services you sell (marketing or operations issue).

3 Variable costs you directly acquire by producing or buying the products and services you sell (These are called variable costs because they increase or decrease as your sales increase or decrease).

4 Fixed costs you incur whether you make any sales or not.

The strategy you come up with involves taking action to increase or decrease any of the four factors in consideration of its impact on, or the impact from, each of the other factors.

Here is an example of learning to measure profitability and make changes. A few years ago I met with owners of a service business that had not been profitable since it started two years prior. I prepared a break-even summary for them, which is a simple equation that says how many sales dollars or units sold are necessary to cover fixed and variable costs.

The conclusion was they needed eight sales a day to break even. Their gasp of horror was the only thing I heard. “But we can only process three sales a day,” they said. “Ah ha,” I responded. “There are two things you need to do to improve profitability in your business.”

1 Streamline your system, (operations), so you can handle more quantity of sales.

2 Raise prices. In this case the paperwork around each sale is what was providing their value to the customers.

The reason it took them a few years to recognize they weren’t profitable was because they were not keeping on top of their bookkeeping. Bookkeeping errors is my fifth addition to the four factors of profitability. SBDC advisors around the state will agree that nearly all of the businesses they advise have errors in their books.

One of the best things a business owner can do is to learn what each report means, how to read it and how to set it up to accurately reflect the true activities of the business. Questions I often hear are: “What is the difference between a balance sheet and income statement? Why does the business show a profit on the income statement yet has no cash in the bank?”

As the leader of the business, learning the answers can be one of the most empowering things an entrepreneur can do. When set up correctly, the information in these financial reports can be used to make accurate decisions toward being and staying a profitable business. As the saying goes, “All roads lead to the numbers.”

This article was written by Jennifer Shelton with the Bellingham Small Business Development Center, which is part of the 24 statewide offices of the Washington Small Business Development Center (WSBDC).  Initially seen in The Bellingham Business Journal and at http://bbjtoday.com/

The WSBDC offers in-depth, confidential, and no-cost management advice to businesses within Washington State.