5 Steps That Improve Cash Flow
Cash Flow is essentially the flow of actual money in and out of your business. It does not including accounting items like depreciation or transaction items like sales via accounts receivables. Cash flow is the stuff that is used to pay bills, meet payroll, expand businesses or take profit.
The following are 5 ways that you can improve your business's cash flow:
Account Receivable Collections: If you have customers that are constantly paying late - try to find ways to improve your collection efforts. This could be sending out notices earlier. Calling accounts payables or managers directly instead of sending written notice. Or, sending reminders of payment due dates and the penalties of late payments (really outlining and stressing the penalties) more often or sooner during the waiting period. If you don't have penalties for late payment - this is a good time to put them in place - make them significant - and, highlight them on your invoices and when dealing with customers.
5 Steps That Improve Cash Flow
Offering Payment Discounts: Following the above item, offer customers discounts for paying early or paying in cash. This not only helps speed up and improve your cash flow but can also benefit your customers - keeping then loyal to you.
Vendors Discounts: Just like offering early payment discounts - take advantage of the discounts offered by your vendors or suppliers. While this might mean that cash is flowing out of your business sooner than before - it could mean that less cash is flowing out. If this is not an option for your business, you can negotiate with your supplier and vendors to extend longer payment terms. This will then give you more time to collect from your own customers before payment is due to your suppliers.
Up Sale or Cross Sale: Understand that it is more profitable and less expensive to sale to existing customers than it is to acquire new customers. Know that informing existing customers of other products and service your offer or explaining the benefits of your premium product and service not can help you improve your cash flow but can benefit your customers as they may be unaware that you have offerings that can improve their lives or business.
5 Steps That Improve Cash Flow
Using Credit Cards: The key here is using the billing cycle and grace period to delay payment. Now, this will only really work if you can and will pay off your balances at the end of each cycle. Let's say that your billing cycle runs from the 15th of each month. Thus, your credit card company will take all charges between the 15th of the previous month and the current month - combine those into your bill - then give you a grace period of up to 25 days to make the payment - without interest or penalty (this does not work with cash advances). Thus, if you make purchases early in your billing cycle, you could delay payment on those purchases for up to 50 or more days - essentially creating your own payment terms.
Lastly, as a bonus method of improving your business's cash flow - you can raise prices. Just be aware that you should only do so if your competitions' prices are higher than yours. You do not want to drive away your current customers especially if you are considered the low cost provider.
These are methods that can really make a significant and positive impact on your business and your profits. These are methods that can be used in any economy - good or bad.
buying a small business, broker turned me down?
I’ve been shopping around on craigslist with some success, but just recently tried the bizbuysell website. Found a few good ones I want to look into, filled out the confidentiality agreement with a broker that listed all my finances on it. He called me and pretty much told me I can’t buy a business if I wanted to and that I need at least $100K cash on hand to buy one. I have $20K on hand, $40K stuck in the UK, $45K stuck in inventory, and $50K worth of credit card credit. I was requesting info on a $130K business and a $185K business. He went on to say you need at least 50% down to get owner financed and banks aren’t lending right now specially for restaurant purchases, blah blah. It doesn’t make sense to me because the broker is pretty much turning away a potential customer. I mean, do ALL business sellers require 50% down? When I was looking at a smaller one for $40K, the seller only wanted 20% down.
When I look at it logically, the business is $185K and reports a $100K annual net profit. So if I even managed to put $40K down, that leaves $145K that I could pay back FROM the earnings of the restaurant. I just don’t get it. TONS of people don’t have 10-20% for a down payment on a house, so how can people possibly expect people to have 50% for a business (that makes money vs a house not) especially in this economy? Also, doesn’t with owner financing, if I were to fail to pay, wouldn’t that mean the owner would repo the business pretty much?
*confused*
I’d realllllly like to buy another business though :/
The broker is trying to be realistic for you.
You will not find a business selling for $185k which returns a $100 k net profit. You just won’t, it would be worth closer to $500k-$1 million.
If you DID have a business such as this, it obviously has little in the way of assets, but consists totally of ‘goodwill’. Goodwill is the value of a business over and above it’s actual physical assets. For a small business, that means actual good will, in other words the reputation and connections the owner has made over the years. If the seller was foolish enough to sell to you without a large down payment, he risks you screwing up his goodwill, and if you do, what does he have to repossess?
It is VERY common for banks and other lenders to demand a much higher net worth before supporting a business. If nothing else, the cashflow of the company needs to be buttressed by personal wealth, or it become very unstable, working hand-to-mouth. so to speak, and will quickly fail.
The primary cause of small business failures is lack of capitalization, lack of money to operate in other words.