Came across this great article about how small businesses can manage their company and operations to avoid getting themselves into a cash crisis.
Far too many businesses these days struggle with their cash management – forcing many good businesses to close up shop. You have heard the term “growing your business broke” – well it is a term that many entrepreneurs know by heart.
In this article, the author outlines several methods that all businesses can use “to protect your company’s precious cash life line.”
No. 1: Respect cash flow forecasting. When entrepreneurs come up with a new product or service idea, it is customary for them to estimate the size of the customer market, check out competitors and design the final product in such a way to maximize profitability and customer appeal. Smarter entrepreneurs consider the timing of cash needs in their planning too. If the balance of incoming and outgoing cash is too tight, they have time to alter their plans to avoid a cash flow crisis.
No. 2: Limit exposure to high-risk customers. Are your largest customers also your company’s slowest paying customers? If so, take immediate steps to diversify the customer mix to favor faster paying customers. Sales commission payments should be tied to the timing of customer collections too.
No. 3: Bill frequently. Most service-oriented businesses bill on a monthly basis or at the end of a project. Why not bill customers every week or every two weeks in the form of progress payments? The faster companies invoice customers, the faster they get paid.
No. 4: Reduce dependence on a single funding source. As too many entrepreneurs have learned, it’s relatively easy for banks to pull credit lines when companies can least afford it. To minimize the risks of sudden cash shortfalls, smart entrepreneurs set aside one or two credit cards for emergencies. More established companies maintain relationships with multiple banks and take every opportunity to network to credit officers from big and small banks.
The first time a lending officer learns about your company should not be the day you are desperate for cash. If you don’t know the names of at least four bank credit officers, ask your business colleagues for referrals now!
No. 5: Streamline product lines. Entrepreneurs who don’t have a lot of loose cash should avoid producing too many products in too many styles to sell to too many different types of customers. The more complex a company’s product line, the more cash that is required to produce, store, advertise and deliver goods to customers.
No. 6: Set high profitability standards. The companies that are most vulnerable to financial heartaches during a recession or credit crisis are low profit margin businesses. Simply stated, low margin businesses have no margin for error. Don’t be shy about axing products or services that don’t match or exceed your industry’s average profit margins.
Could not have said this better myself. Remember that growing a business is not about what you, the business owner, can take out of it (as that will come). But, growing a business is doing (managing) what is right to get your business to that point.
What would you rather have – a few bucks in your pocket right now or a lot of cash in your pocket later after your business has made a lasting impact?
To read the entire article, visit Fox Business News.
