Tag Archives: cash flow

5 Methods to Improve Operational Cash Flow

Running a company is a process that’s supposed to earn you money, yet, even the most low-cost of businesses (simple drop shipping e-commerce operations) have some starting costs. Most other business models come with regular costs (a lease on office space, employee salaries, utilities and more). In other words, you need some operational cash flow to keep it all running and there are ways to make this more reliable.

1.      Conduct a credit check on customers

A lot of businesses find themselves in need of a debt collecting agency when, in reality, they were supposed to think about this problem a lot earlier. One of the ways to avoid this problem is to conduct a credit check on customers, especially if you’re in an industry with an unusually large value of an order and have a payment system that comes in many credit payments. Sure, this may take a lot of time, effort and resources, yet, it can help you avoid the scenario in which your credit payments aren’t arriving in time, or aren’t arriving at all.

2.      Hire a debt collection agency

Previously, we’ve mentioned the fact that it’s best to avoid the need to collect debt, if possible. However, the problem lies in the fact that, sometimes, such a thing won’t be a possibility. Think about it; every person with a bad credit history has had one point in their life when their credit history was still flawless. In other words, just because they were always responsible when it came to their payments in the past, that doesn’t mean they’ll keep up with this practice in the future, as well. In that case, you might be compelled to hire services of a debt collecting agency. Fortunately, this practice is nowhere near as bad as it sounds, seeing as how it comes with numerous benefits of its own.

3.      Sell invoices

So far, we’ve talked about credit payments that are either late or not coming. However, what if these payments are coming in time, yet, you need the entirety of the money right away. In that case, you might want to try and sell some of those account receivables. This is a scenario where you get to sell your invoices to a factoring company and get the majority of their full value right away and a small part once the factoring company receives the money. Of course, they keep a small fee in exchange for their service. This nonetheless is a lot closer to selling your assets than getting a loan.

4.      Getting a loan

Sometimes, you’ll need the money right away, however, this might not be the money that you have on paper, like was the case in previous examples. You see, a lot of businesses simply need more cash to stay afloat before their business becomes profitable. For a business to become self-sustainable, it sometimes takes between six months and two full years, which is the amount of time that a lot of first-time entrepreneurs tend to underestimate. In this case, your safest bet may lie in the idea of applying for no security business loans.

5.      Incentivize immediate payments

The last thing you need to do is encourage those who want to pay for the full value of the order (in cash or by using an electronic payment) by offering different sorts of incentives. Sometimes, this can be an additional offer to sweeten the pot, while in some scenarios, you’ll be offering them a chance to pay less. The net result will be similar to when you’re selling your invoices but the procedure will be a lot simpler and you’ll have your money even faster.

Conclusion

At the end of the day, improving your operational cash flow is a tricky business in which you’re bound to encounter numerous solutions, each of which has its advantages and downsides. In any case, you have a problem that needs to be resolved and you have to pay in order to solve it. Now, whether you pay a debt collecting agency, factoring company, or return interest to a lender is up to you. Just keep in mind that this is a necessary expense for your business to stay in the game.

Why Does Cash Flow Have Priority over Profit?


Perhaps one of the most frequently asked questions in the world of business is: should I focus on profit, or make cash flow my priority? Although they both play critical roles in your business success, there are some points to be made in cash flow’s favor. So, don’t fall into the trap of putting all your efforts into making profit, since it is not the main indicator of a successful business. There is no denying it is crucial when observing the bigger picture and long term benefits, but while trying to stay afloat in a sea of corporate sharks, you need stable cash flow to maintain financial health.

The difference between profit and cash flow

These two different financial parameters have a certain impact on your business. Cash flow is the money that goes in and out of the company from various investing activities. You need it to meet your current needs and obligations. On the other hand, profit is the money that remains from sales revenue after all the business’s expenses are subtracted.

To put it in more specific words, if a contract is worth $60,000, and it costs your company $40,000 to provide a good service, your profit will be $20,000.

We can use the same example for cash flow. If your client decides to pay you in two stages of $30,000 each, you will send the first invoice and expect your first payment in about 30 days. A month later, you will send the second invoice and like the previous, expect it 30 days after. Assuming you receive the money on the exact due date you will have the cash inflow you need to keep your business running.

The importance of cash flow

Have you ever heard of the expression “cash is king”? Well, there is some good reasoning behind it. Without cash, how could you be able to pay staff and buy the necessary equipment and material for your job? Besides, every business reaches a moment when sales are in a slump, and there is no profit in sight. In that case, you need the cash flow to keep you afloat.

When cash flow is slow

It’s never a good thing when there is not enough profit, but when there is not enough cash flow, that could question the existence of the entire company. After all, employees will not be willing to work for free and your company will not be able to provide services that require previous investments in material and equipment. The cash flow squeeze can happen for various reasons:

  • Slow-paying customers
  • Seasonal fluctuations
  • Need for quick capital in order to pay contractors, suppliers and service providers
  • You need the capital for business growth

If one of these situations occurs to you, you can always check out some invoice finance options that can fund your cash flow whenever you need it. This way you can shorten the period of waiting for invoices to be paid, because the company you choose will advance you the cash.

Business boom – cash flow dependence

In 2014 Inc. magazine published an article about three business owners who were faced with the problem of cash flow squeeze that happened during the period when their businesses were booming. On the surface, fast growth seems as a good thing. However, when a small business grows from hundreds to thousands of transactions per month, it makes the managing team lose their grip on finances. The thing is, when businesses grow, they become more complex, and some rules about billing and invoices become different. Meanwhile, more cash is needed to cover higher taxes, inventory, compliance expenses and debt. So, yes, ironically, as your sales go up, your cash can go down, and this can get you into serious trouble. In order to make it through the business growth, you will need a stable cash flow. The easiest ways to do that is through a proper accounting system and invoice financing.

Both profit and cash flow are important financial parameters, but if we would have to give an advantage to one of them that would definitely be cash flow, because without it, your business would be doomed.