You’d be shocked to learn how many business owners confuse profit with cash flow. If you know one of them, tell them cash flow is the difference between the money coming into their business and leaving it during a given period of time. Tell them that positive cash flow means they’re accumulating the funds required to pay bills and make investments. And if their cash flow is negative? Well, that’s a bad thing.
To stay as high in the plus column as you possibly can, try these eight cash-flow boosters recommended by business experts.
1. Increase your prices
Take a leaf from your suppliers and raise your prices, advises Ross Pinkerton, president of Toronto-based cost-reduction consultancy ERA Canada. If you can’t increase prices across the board, then focus on any low-margin products. “Based on ERA’s experience,” says Pinkerton, “75% of clients will accept the increase without resistance.”
2. Minimize supply costs
Reject price increases from suppliers that aren’t justified by hard evidence, and review contracts to determine whether you are paying too much. If so, renegotiate or switch suppliers, advises Pinkerton.
3. Amortize your expenses
“Consider leasing a building, equipment or transportation instead of buying it,” says Rick Chittley-Young, an Oakville, Ont.-based principal with accounting firm BDO Dunwoody LLP. For instance, if you can lease a $50,000 piece of equipment for $1,500 a month rather than buying it outright, you’ll free up $32,000 for the year. And consider increasing the amortization on your long-term debt, which will reduce your monthly payments (but cost you more in the long run).
4. Use the right kind of debt
Use long-term debt rather than your operating line of credit to finance long-term assets, such as property or equipment. “If you finance long-term assets with your line of credit, you’ll max it out,” says Natasha Fletcher, director of financial advisory services for Grant Thorton LLP in Halifax-and that will leave you with no credit to cover short-term emergencies. “Leave your line of credit free to pay suppliers or payroll.”
5. Reduce your inventory
“Explore every avenue for reducing inventory levels and costs,” recommends Pinkerton. Ask suppliers whether you can buy on consignment, which will allow you to return inventory that doesn’t sell. Have a sale to liquidate slow-moving merchandise.
6. Shorten your receivables
Change your payment terms from 60 days after invoice to 30 days. Provide a small discount to clients who pay early, and charge interest on late payments, suggests Chittley-Young.
7. Collect what you’re owed
Monitor your receivables on a weekly basis. Employ someone to chase late payments, or hire a collection agency to do it for you. Approach your clients the day after their payment is due.
8. Stretch your payables
Unless there’s a significant benefit to paying a bill as soon as it comes in, such as a worthwhile discount or the trust of a skittish supplier, hold onto your cash till the bill is due — you never know when you might need it.