6 Ways To Maintain Positive Cash Flow

I have mentioned it before, and I’m sure I’ll mention it several times again: Cash flow is one of, if not the most important aspects of a healthy business. In fact, healthy cash flow is probably one of the most important aspects of a healthy home as well.

Making tons of money is great, and everyone strives for it. It isn’t nearly as important as cash flow though. Sure, I could bring in $1,000,000 a year in profit, but if I can’t get $1,000 cash out of my bank when my car breaks down, what’s the point?

Instead of listing off all the ways to mess up your cash flow (I’ve seen too many to list), let’s go over some simple ways to keep the lifeblood flowing through your company.

1. Don’t spend all of your seed money

It doesn’t matter how you get it. Maybe you got a bank loan, you took cash advances from your credit cards, or you sold your baseball card collection. However you got the money, try to hold onto it for as long as you can. If you set aside $10,000 to start the business, resist the urge to immediately spend all the money. Sure, maybe you’ll get a better deal from a vendor if you buy a year’s worth of product at once. That new truck might seem like a great way to promote your new business. Just remember; emergencies happen, and developing a strong customer base takes time. If you can, try to keep 25-50% of your initial investment in the bank (or somewhere it can collect some interest while remaining highly liquid if you suddenly need it).

2. Reduce or eliminate accounts receivable collection times

Ideally, start out your business on the right foot by collecting from your customers at the point of sale. If you are in retail, make sure they don’t leave with the product before you get paid. If your service stretches out over a long time, get a deposit, and then final payment when you’re job is done. If you have to offer terms, keep them short. Instead of offering Net 30, try Net 10. Try offering an incentive for early payments. Give the customer a 1-2% discount if they pay immediately, or full price if paid in 10 days.

3. Setup or extend accounts payable terms

For the first couple months, most vendors will require you to pay immediately for your orders. Once you’ve established a good rapport, ask for terms. On small orders, see if they’ll give you Net 30. On larger orders, try asking for Net 30/60/90 to split up the order into 3 manageable payments. In addition, try asking for an early payment discount to save you some money when you do pay in advance. The most important aspect is to make sure your customers pay you before your bills are due.

4. Avoid unnecessary fees

If you do #2 and #3 properly, this won’t be as big of a problem. However, if you start paying your bills late, you’re going to start accumulating late fees. Having poor cash flow will almost always lead to higher bank fees as well, since you’ll be paying interest on loans, credit cards, overdraft fees, and NSF fees that people with cash in the bank simply don’t have to pay.

5. Resist the urge to offer large discounts

I recently read an article about this on the Intuit Small Business Blog. Be realistic about how much you need to charge. Please don’t let me hear you say; “We lose money on every sale, but we plan to make it up in volume”. Before you sell your first widget, run the numbers to find out how much it will cost you to make each widget. Then, set your price so that ALL of your costs are covered at the end of each day, week, month, and year.

6. Pay yourself first, but be reasonable

Business owners usually fall under one of two extremes when it comes to paying themselves. They either play the martyr and never pay themselves, or they overcompensate and drain the company. The first couple years are going to be tough. You can’t expect to earn Fortune 500 CEO calibre salaries right away, but you also can’t do all this work for nothing. Find an amount that fits the budget you setup in #4, and stick to it. Pay yourself a set amount on a specific schedule, and don’t use the company as a personal bank account. Paying for personal expenses through the company makes bookkeeping a nightmare, and you always end up spending more than you think by doing it this way.

This is by no means a comprehensive list, but I think this covers the simplest ways to get your cash under control. Do you have any other suggestions? Please let me know in the comments.

Are you having cash flow problems of your own? I’d love to help. Please contact me and I’ll do my best to get your business back on track.

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