Methods for Maintaining Healthy Cash Flow: Tips for Small Businesses
Maintaining a healthy cash flow is the most important thing you can do to ensure the longevity of your business. Cash flow problems can sink your small business before you even know what hit you. Don’t let debt, unanticipated expenses, excess inventory, and slow-paying customers tie up the cash you need to make your bill payments. Improving your cash flow is all about speeding up inflow and slowing down outflow, and the Law Office of James M. Braden tells you how to do just that!
Get Your Legal Ducks in a Row
Before you do anything else, make sure your business is set up to operate legally. Legal issues can create significant costs for your business. A tax lawyer can offer valuable legal advice concerning U.S. and international tax law, and help you make sound decisions to avoid problems with the IRS.
Establishing a formal business entity can also help you keep more money in your business. Compared with other business structures, sole proprietorships tend to enjoy the lowest tax rates. Because sole proprietorships are easy and inexpensive to set up, most small businesses start out with this formation type. The specific steps for setting up a sole proprietorship can vary depending on where you live, so be sure to do your research!
Lease Business Equipment
Avoiding major purchases is key to protecting your cash flow. Even if you can afford to buy equipment outright, consider leasing costly tools instead. Having the extra cash on hand will ensure you can always pay the bills without having to liquidize fixed assets that are necessary to your day-to-day operations. Just be sure you understand lease conditions on maintaining and modifying equipment, as well as the opportunity to buy equipment when the lease ends.
Manage Your Inventory More Effectively
As you know, having a lot of cash tied up in excess inventory isn’t great. Chron explains that effective inventory management is essential for maintaining inventory stocking at an optimal level. Keeping track of inventory levels, inventory quality, and inventory costs over time will help you make smart ordering decisions. Remember that understocking can be bad for cash flow as well! Holding too little inventory means missed sales and reduced customer satisfaction. Improve your inventory process with a good inventory management system, so you can sidestep avoidable cash flow issues.
Encourage Customers to Pay Faster
The faster your customers pay their invoices, the better. Unfortunately, Paystone reports that 94% of invoices take more than 30 days to be paid! Waiting a long time for customer payments can create serious cash flow issues, even if your business is meeting your sales and revenue goals.
Thankfully, there are a number of steps you can take to encourage faster payments. Establish clear payment expectations before you do the work, consider dividing payments over the work period, and send payment reminders at set intervals. You may be able to get clients to pay invoices faster by setting up rewards and penalties. Importantly, make it as easy as possible for clients to pay you by offering a number of different payment methods and including payment links directly in your invoices.
Negotiate Better Payment Terms with Suppliers
On the flip side of increasing cash inflow, look for ways to reduce cash outflow. Talk to your suppliers and try to negotiate more favorable payment terms so you have more time to earn cash from your sales before your bills become due. If you have a long-standing relationship with your supplier, you may be able to arrange later payment due dates. Try to make your proposition mutually beneficial. For example, the freed-up cash might enable you to increase your order volume!
Good cash flow practices will keep your bottom line trending in the right direction. By keeping an eye on your cash flow, you’ll have a much better understanding of the liquidity of your assets and your ability to meet your financial obligations.
The Law Office of James M. Braden is ready to serve you as a full-service business law and litigation firm. Team up with us today! (415) 595-4385