Cash Flow – How It Affects Small Business

Whether your business is small or large, cash flow is essential for survival. There are times in any business when cash is plentiful and other times when cash is scarce. While it may be somewhat hit and miss, it is important to analyze your business cash cycles as accurately as possible, and more especially when your business is young or in a growth stage.

Have a Cash Flow Plan

It is not always possible to regulate the things that can impact your company’s cash flow, even when you are diligent in following up your accounts receivable and managing your accounts payable. Consequently, it is highly advisable to have plans in place that permit additional money to be accessed in the event of unusual events in your business.

There are ways to boost cash flow even in tough times, so let’s consider some of the options.

Increase Prices

This may sound counter intuitive, but most small businesses tend to undercharge. So one of the options you should seriously consider to increase cash flow is to raise your prices.

Ask yourself this question: “If I put up my prices by 5%, how much business am I likely to lose?”

The answer may astound you. By the way, it might also be a good idea to get your accounting professional to help you answer questions like this.

Sales Promotions

Sales promotions are not just the realm of larger companies. Small businesses can use them as well, especially when times are slow. You may be able to have a ‘scratch and dent’ sale to sell slow moving, damaged or obsolete inventory items. You could consider loyalty offers that reward people from buying from you on an ongoing basis. Have a promotion that ties in with different holidays in the year, such as Valentine’s Day, Easter, Thanksgiving and Christmas. An end of year sale or a birthday celebration sale is another option.

Sell or Lease Unwanted Assets

Another method that you can make use of to boost your small business cashflow is by leasing or selling assets of the business that are no longer being used. Disposing of such assets can clean up your balance sheet as well as providing much needed cash flow. Items might include plant and equipment that is no longer used as well as inventory that is obsolete.

Discount Prices

You can increase small business cash flow by discounting. Everyone loves a bargain and discounting can generate more sales. The problem with discounting is that you have to sell more volume to make the same amount of money. For example, if your sales gross margin is 33% and you discount by 10%, your volume has to increase by 50% to make the same amount of profit. So discounting is not a long term strategy, but it can be used as part of your overall Cashflow management strategy.

So there are a few tips for increasing cash flow for a small business. But as I said at the start, cash flow is essential for the survival of a small business. It is more important than profit because a business can survive for a period of time while making a loss, but if you need to pay suppliers or employees and you have no cash, your survival is under threat.

The bottom line is this: You must make sure you pay attention to your cash flow.

Here is a video from Bank of America with more tips on how to manage your cash flow.