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By Amy Collet
As a small business owner, you need to maintain a healthy cash flow by balancing your income and expenses. The simple goal is to have more money coming in than going out. However, it is not that easy to achieve, as there are various factors you need to take into consideration while managing your cash flow. Explore these tips, courtesy of Bright Analyst.
Maintain Good Relationship with Suppliers
Having a good relationship with suppliers is important to maintain a healthy cash flow. At the start ensure that you pay the bills on time and have open communication regarding goods and payments.
Once you have created a rapport with your supplier, inquire about discounts on early payment or offers on buying goods above a certain quantity. These offers are not always advertised and will help you pay less for your supplies.
Additionally, if at times money is tight, you can negotiate to make payments in a few weeks or along with your next order. It all depends on the relationship you build with your supplier.
Practice Effective Customer Management
Provide discounts and offers to customers that encourage them to pay early. For example, you can provide a 1-5% discount on bills that are paid within 5 days of delivery. This will ensure quick receivables to your account and form a strong relationship with your customers. Discount offers are important to attract new customers.
For old customers with a good track record, you can offer flexibility in payment and certain custom offers depending on their needs.
Furthermore, it is important to keep a check on overdue accounts. An overdue is money which you expect to be paid but has not. This negatively impacts your cash flow. Closely monitor accounts that frequently default on payments, and send them reminders for past and present dues. If the situation does not improve, Business News Daily suggests using a collection agency.
Strongly reconsider doing business with such customers and stop shipping goods or providing services until payments are made. For future scenarios, consider moving to a cash-on-delivery system for customers who you feel could be frequent defaulters.
Keep Your Costs Down
Whether it be unused office vehicles or stationary that is still in its packaging, everything adds a cost to your business. To maintain a healthy cash flow, reduce your costs as much as you can. You can achieve this by–
- Selling unused vehicles, real estate, and machinery
- Improving your inventory management
- Cutting back on employees, if you feel that you are over-staffed
Additionally, according to Investopedia, it is important to ensure a healthy Inventory Turnover Ratio (ITR). The more time you hold inventory, the more money you pay on its insurance, maintenance, and storage. Ensure you meet the ideal ITR depending on your industry to keep a steady flow of receivables and reduction in costs.
Switch to a Sole Proprietorship
Establishing your business as a Sole Proprietorship can help you improve your cash flow. How? A sole proprietor can avail various benefits such as lower tax rates and tax write-offs. Moreover, registering your business as a sole proprietorship is easier and cheaper compared to other types of businesses.
As per the law, a sole proprietor and the business are a single entity. Hence, the business owner is taxed only once, when they file their income tax, even though their income is derived from their business. Conversely, in certain other business structures, the owner has to pay taxes twice, on their personal and business income. There are various other legal and financial disclosures on income required by the government for other structures, too.
Furthermore, a sole proprietor can avail of tax write-offs on expenses such as – travel, operating expenses, marketing, purchasing of inventory and assets, and more. If your business incurs a loss, that can also be used to reduce the amount of tax needed to be paid. If getting started is daunting, an online service like ZenBusiness can walk you through it for a small fee, and you’ll be up and running in no time. As a business owner, having a healthy cash flow is important for your business to be successful. Maintaining your cash flow requires reducing costs, efficiently managing your inventory, and ensuring a steady flow of receivables. It is a continuous process, which involves various moving parts, however is completely in your control.