This is the second of three blogs about cash flow problems and solutions, particularly relevant to startups, and also for small businesses. In Part 1, we discussed the first three of seven preventive strategies for all businesses: 1.) Get accounting books organized. 2.) Use a cash-flow budget. 3.) Get customers to pay quickly.
Here in Part 2, we continue to address the remaining preventive strategies: 4.) Rein-in unnecessary spending and stay alert to potential pitfalls. 5.) Stretch out payables. 6.) Manage inventory properly.
4.) Rein-in unnecessary spending and stay alert to potential pitfalls
Sometimes growing a business too quickly can cause cash flow issues, when income is not catching up with expenses and wages. Getting a line of credit from a bank, such as an overdraft protection or a short term loan can bridge the gap.
B. Impulse spending
A rookie entrepreneur might overspend in the first few months after his startup first gets funded. Having a detailed financial forecast and budgets which are monitored and implemented by a CFO can greatly reduce impulse spending.
C. High overhead expenses
High overhead expenses can be a persistent problem for cash flow if they get out of hand. Overhead expenses such as office leasing, business vehicles, gas, telephone, utilities, etc., are not tied directly to selling a specific product or service. Controlling overhead requires periodic auditing your expenses to reduce waste, or finding cheaper options.
5.) Stretch out payables and spread out receivables.
A. Reschedule Payments
If monthly payments’ due dates are clustered at one particular part of the month, consider negotiating due dates spreading throughout the month.
B. Pay less by paying annually
If an annual subscription is cheaper than monthly payment as some service providers will give discounts for paying annually, take advantage of an annual payment, provided that you also want to have a long term relationship with this provider and you have enough funds for a large lump sum annual payment.
C. Spread out your customers’ payment dates
This helps predicting cash flow with a built-in revenue cycle throughout each month.
6.) Manage inventory properly.
Excess inventory sitting on shelves can tie up cash flow. It takes a lot of fine-tuning of volume, sales forecasts, available cash, and supplier capabilities to give products shortest possible time on the shelves. Carefully monitor inventory, and make sure not to have key products out of stock to avoid losing clients.
Purchase order financing allows you to finance the supplier expenses associated with large orders that may exceed your cash flow capabilities.
(To be continued.)
We at a2zCFO help businesses navigate through calm and troubled waters with more than 30 years of experience, as your outsourced CFO and your co-pilot. Contact us for a free initial consultation. “Keep your ship on course.”