“The measure of success is not whether you have a tough problem to deal with, but whether it is the same problem you had last year.” - John Foster Dulles
One of the most important steps to increase cash flow in your business is to first identify the source of your situation, then take the necessary steps to find a solution. In my last article, I outlined some signs that you can use to identify the symptoms of low cash flow in your business. Here is a link to this article if you missed it. If you have low cash flow, you may have considered a few alternatives such as getting a loan or increasing your sales. You may even have tried doing these things, but realized that the results were short-lived. Here’s why these alternatives may not be the best solution for your situation.
Getting a Loan
Business loans can serve as a temporary solution to push your business in the right direction. However, it is not a permanent solution because once the funds are used up, the cash shortage will occur again. In addition, your business’ cash outlay will increase since you have a loan and interest payments to make. Getting a business loan, or financing working capital can be a great way to move your business forward. While debt financing can work in some situations, it is not a one size fits all solution to cash shortages. Understanding the reason you are getting the business loan is important so that you can eliminate times where you can use other cash flow strategies identified in this article to fix your cash shortage.
Business owners often feel that the answer to low cash flow is to increase revenue or sales. The problem with that is, that the cash flow situation may be due in part to the type of sales the business has. The sale of some products or services may add additional costs to the business, while others may not be a profitable sale thereby creating capacity issues on working hours, and putting a strain on existing resources. Not all sales are the same. Increasing sales or selling more can work for some businesses, but only if they do not have a pricing or profit margin issue. If you are having a cash shortage, examine why you are having the problem before you make a decision to fix it. Some strategies may actually make the situation worse.
Cash shortages can be due to numerous reasons in business. Here are 3 solutions that have been proven to fix a majority of cash flow problems:
1) Shorten Your Cash Conversion Cycle
2) Allocate Your Cash
3) Know Your Margins
Shorten Your Cash Conversion Cycle
Cash conversion is the rate at which you turn products and services into cash. In order to increase your cash flow, you will need to understand the basics of cash flow so that you can align the time that money comes in and the time that money goes out of your business. As a result, you will avoid late payments, insufficient funds, and financial stress. There are several things that you can do to better align your revenue with your expenses to avoid fees and complicated business relationships.
Allocate Your Cash
Cash allocation is all about focusing on meeting the daily, weekly and monthly cash targets for the purpose of paying the bills, paying an owner’s salary and having a cash reserve at the end of the month. Cash allocation will help you to see where there are gaps in your cash flow, so you can close them.
Monitor Your Profit Margins
Profit is a driver of cash flow, so business owners will need to ensure that all products and services are profitable. Many business owners are not aware of their profit margins and having unprofitable products and services can actually be decreasing your cash flow. For every dollar that you earn in your business, you will need to ensure that you are able to tell what percent of that dollar is left in the business after all expenses are paid.
Knowing how to implement the strategies for these cash flow fixed will help you to preserve cash in your business without getting in debt or having to increase your revenue. Having these fixes will allow you to increase your bottom-line and cash reserve once you are able to scale your business. Using these 3 solutions to cash flow management, will allow you to make the money work for you in your business.
If you are looking to learn more about how you can start increasing your cash flow, I would like to offer you a special discounted price on my Cash Flow For Business Growth Online Program. Here’s what you will learn in the program:
· The Basics of Cash Flow
· How to Address Common Cash Flow Myths
· How to Identify Cash Flow Problems
· 4 Steps to Increasing Your Cash Flow
Limited time offer!