Managing Your Cash Flow ~ Part 3
4. Don’t keep too much cash in your account.
You should have a good idea of how much cash you’ll need to use in a month to deal with you payables, your payroll and keep a small float. Everything else should be put against your line of credit if you are using that as your financing option. If you’re not using credit, then the money should be invested to earn some return.
5. Manage your inventory tightly.
Every item you have sitting on your shelves represents money that’s tied up. Until you sell that sucker, you can’t get your money out. This applies to parts, tools, and envelopes. Stocking up may feel good, but it’s a cash flow killer. And while you may get a better deal buying in bulk, you must weigh your savings off against the money you will have tied up in inventory. If it’s tied up for more than 90 days, that’s too long.
Keeping a lean inventory means accurately forecasting what you expect to sell weekly and monthly. If you carry multiple items, make sure you know the 20/80 rule – 80% of your sales will come from 20% of your inventory – and ensure you inventory-up to match what you’re selling the most. Then you can work on minimizing the inventory on items that are selling poorly or infrequently.
Don’t forget to shop around on suppliers. While you may grow comfortable buying from one supplier, not knowing how his price compares to the marketplace is a business sin. Even if you’re paying slightly more to a supplier because you’ve weighed the additional cost against the speed at which he can deliver and speed has won, as long as you’ve made a conscious decision then you can be confident in it. If you’re paying more because you’re ignorant about costs, you’re a dope.
6. Think about Continuity Sales.
This is a snappy term for a simple concept that’s best illustrated by an example. Think about magazine subscriptions. You can buy a 12-month, 24-month or 36-month subscription to your favorite magazine, and the longer you take the deal, the better the price you get. The magazine publisher gets more money up front, and your cost per issue goes down. That’s continuity sales, and it can apply to anything. Let’s say, for example, you’re running a landscaping business. You get people to pay for an entire season up front for a reduction in the per visit cost. You’ll trade a discount for getting the business, ensuring a steady cash flow for months to come. (You can chalk that discount up to “marketing” costs.)
While you can structure the payment for continuity sales any way you want, getting the money up front often works best because it guarantees the customer’s commitment.
Most businesses have times of the year when they do better, and times when things slow down. That seasonality plays hell with cash flow if it’s not managed since you have fluctuating levels of income and expenditure. One of the best ways to overcome seasonal cash flow crises is to diversify the business. Your objective should be to have something you can focus on to bring in money when your primary income producing options have gone quiet. Landscapers can do snow removal. Tea stores can run special promotions focused on auxiliary products. House cleaning services can add “shopping” services for shut-ins to round out their slow periods. The key is to find something that complements your current offering so customers find it easy to continue to use your products and services.
Of course, if you’re going to have a dry spell that you can reasonably predict, you’ll have to store up a stash of cash when times are good to get you through or you’ll end up with a cash flow shortfall. And that’s tomorrow’s final blog on the subject.