Running a successful business requires a sober mind, solid cash flow, proper management, and productive workforce. Among the aforementioned, cash flow plays the most crucial role since an entrepreneur cannot have a productive workforce and proper management without it. For any business to prosper, the amount of cash flowing into the business should always be more than the amount flowing out.
However, the rule of the thumb stated above has been quite a headache for many businesses to handle. No wonder not everybody succeeds and prospers when it comes to entrepreneurship. For those aspiring to be future business men and women, it is good you have landed on this site. You will be able to read in the sections below the best ways to conserve cash flow in your business.
Sell Unwanted Capital Equipment
As a business owner, it is good to keep your mind working like a clock. You should always be on the lookout to discover what is wanted in your business and what is already obsolete. In this technological era, customer requirements are changing as well as the production materials. This means that any business equipment that is no longer needed should be disposed of so as to create more space for modern things that are valuable to the business.
Sign Payment Contracts
Conserving cash flow is a science as well as an art which, if not well manipulated, can backfire at times. It needs a high level of intelligence. You have the ability to convince both your customers as well as your vendors to enter into different types of payment contracts with you.
For example, when dealing with your vendors, you may negotiate and enter into contracts with them so that they supply you with the commodities for one month before you make a payment. This will enable you to sell the products and make your own profit before even offsetting the debt. With customers, you can convince them to make prior payments before getting the supplies to them.
Put Your Cash Deposits in Interest Earning accounts
Banks nowadays offer interest-earning accounts to businessmen and women who are serious when it comes to making deposits. Having such an account for your enterprise is a very excellent way of increasing cash flow. However, these accounts need you to have a minimum operating balance. You should tell all your customers to make their payments to these accounts so as to start earning interest as soon as possible. As a piece of advice, avoid long-term certificates of deposit (CD) and invest in penalty-free CDs.
Require Deposits on Custom or Large Sales
If your business can work on custom orders or large sales, you should have a condition so that, for such a transaction to be valid, the customer must pay at least 50% of the total asking price. This is because, at times, the demand of these commodities on the seller might go down unexpectedly. When such a thing happens, they might be forced to make a reduced payment for your goods which, in the long term, will hurt your cash flow.
Conversely, you should never enter into an agreement like this with your vendors. Always defend yourself and use your credit history to your advantage. Do not pay your vendors by order. Convince them to lend you items on credit instead of making prior deposits for your supply.
Give Discounts for Prompt Payments
Cash flow is the blood of your business and you need it for your enterprise to remain viable and stable. One of the ways you can achieve this is by encouraging your customers to pay for their goods quickly so as to receive discounts. If your invoice has a 30-day validity period, inform them a 2% discount will be offered on payments made within the first 10 days.
Every customer wants to save money and giving them discounts makes them happier. On your side, prompt payments will be speeding up the collection of debts, avoiding bad debts and increasing cash flow.
Have Interest Penalties on Delayed/Late Payments
No business person wants to punish their customers because they might run away. Nonetheless, you should have such a policy in order to push your clients to make payments as early as possible. It will actually make your customers be on their toes when it comes to debt payments they owe your business. At the end of the day, you will be able to conserve your cash almost effortlessly.
Hire a Collection Agency for Old Accounts Receivables
In any type of business, we have some customers that never make payments on time. If you decide that you will follow all these payments on your own, it will cost much of your time and even make you spend a lot of money on them. This means that you need to hire a third party debt collection agency to help you make a thorough follow-up of these delayed payments.
Most of the time, third-party agencies have the know-how and ability to pursue such accounts at their expense, although you will have to agree and give them a certain percentage of the collected proceeds. If you think this is expensive, then try not following them up!
Have a Layaway Payment Program
This could sound like an outdated thing, but it is still applicable in business anyway. It is a method by which a customer pays for goods prior to their delivery. The customer is allowed to purchase a product which is reserved for future purchase as well as delivery. The buyer has to pay the money before the item is delivered. This gives you a golden opportunity to increase your cash flow since the item's buyer makes advance payment for goods that are yet to be delivered.
Establish an Inventory Credit Line
Inventories of finished products awaiting sale, raw materials, and products that are current assets for your business. This means that they need to be maintained and the entrepreneur has to incur cash expenses. Due to this, it is sometimes advisable to go for an inventory loan from your vendors. The inventory will be used as your collateral for the loan.
This is a better way of getting loans since they do not accrue any interest. Convincing your lenders to give you these loans will enable you to preserve cash flow into your business.
Repair Capital Investment
The rule of the thumb, when it comes to capital investment, is always to repair rather than replace your machinery. This is because machinery is very expensive for a business to buy every now and then. Thus, it is good for an entrepreneur to establish a regular maintenance program for all different types of equipment.
When it comes to replacement parts, do not always go for those from the manufacturer. You can get these parts from third party suppliers. Insisting on getting replacement parts from the real manufacturer could cost you in the long term.
Reject the New Technological Products
We are living in a technological world where there is a new electronic gadget in town every day. Unfortunately, many business owners are falling for their advertisements without making any prior consideration. It is good for you as a business owner to consider whether the new gadget will add any benefit to your company or not. If it doesn't, then there is no need to spend a penny on it.
On the other hand, even if the new commodity adds a certain value to your business, you should evaluate and determine whether it is worth the additional cost or not. If the benefits outweigh the costs, go for it. Otherwise, avoid it.
Buy Used Equipment
Yes, another proper way of conserving cash for your business is to buy used equipment instead of buying new. We all know that new machinery is very expensive and might give your business unnecessary cash outflow. However, the used equipment has the capacity to perform just the same way as new ones and thus instead of buying new machinery, go for the used ones which are in good condition.
Delay Payments for Vendors
Withholding payment of goods supplied to you by the vendors is a good way of conserving cash flow. Try and make sure that you make your payment even on the deadline day as long as you do not fail. At times you may even try to negotiate with the vendors on the terms of payment. If you have to delay the payment, please make sure that you contact the vendor prior to the decision.
This is because unexplained late payments to your vendors could be reported to the credit bureaus as a late tradeline. This could go a long way in hurting your credit report and hence it is always good to stay in touch with your vendors and ensure that such a scenario is not reported.
Use Barter Trade
Barter trade can go a long way when it comes cash conservation for your business. You can talk to your supplier and convince them to accept your products as a form of payment instead of cash. Just tell them that you will be able to pay 30% of your debts in terms of goods and services.
This is a very smart way to conserve cash for your business. If your current vendor is not willing to do this type of business, you are free to look for another one who will be able to accept these terms.
For instance, you may convince an electronic dealer that you will be able to offer him your IT gurus whenever his machines fail instead of employing one himself. The service rendered by your IT expert shall form a mode of payment for the goods supplied by the vendor.
Use Your Credit Rating to Your Advantage
This is one of the emerging issues in business which has taken over the US business community. Businessmen and women are being encouraged to use their good credit rating to negotiate for low-interest rates on loans, insurance premiums, and discounts from vendors. This is a good strategy since it will help you pay low amounts and save a lot on your side. This is a good method to conserve your cash flow and stay in business for longer.
There are several ways an entrepreneur can make sure that they have cash that can be used to run all the business transactions without any strain. The above methods have been proven to work by different groups of business owners all over the world. If you are an upcoming entrepreneur, using the above techniques will go a very long way in helping you succeed in any type of business you want to venture into. Lastly, remember that business is all about taking risks but always ensure that your cash inflow is more than the outflow.