Cash flow for small business is the fuel that drives the engine. Strategy, execution, and the best people in the business don’t make any difference if there isn’t cash to make it go. Virtually every small business owner has struggled with a cash shortage in their business lives. So how do you solve the problem?
Only Eight Options
There are only eight things you can change to increase cash flow. All of the advice falls into one of these eight. They are:
- Pricing (increase prices)
- Sales Volume (sell more)
- Gross Margin (sell more with less direct cost)
- Overhead (cut expenses not related to goods/service delivered)
- Debt (restructure existing loans)
- Inventory (reduce amount on hand)
- Accounts Receivable (increase the speed of collection)
- Accounts Payable (decrease the speed you pay bills)
That’s it! No other magic to work. The first five levers have a “permanent” impact on cash flow, while the last three are one time fixes. In other words, if you decrease the time it takes to collect money owed to you (Accounts Receivable), you will increase your cash flow once, but you won’t repeat the benefit the next month.
Where to Start
Obviously if you can move the needle on one of the first five it will have a bigger impact, since it will increase your cash flow each and every month. But let’s start with the last three, mainly because they are generally easier to implement, and make an immediate impact.
The first place to start is to see what your numbers are. Sounds simple, right? If you have good financial processes in place, it should be. You should be able to access your ACCURATE financial performance at least on a monthly basis. Many small business owners have realized that is not always so simple, however. Quick Books, Xero, and a host of other inexpensive solutions have given the illusion that “do it yourself” accounting is easy. Just because it’s inexpensive, doesn’t mean it’s simple (or easy). If you’re not sure whether your numbers are accurate, check out this article on how to know if your numbers are right.
OK. So now you have good numbers for the last four items. Can you change them to impact your cash flow? The next step is to benchmark your numbers against your industry. Every business is different, so you must compare your numbers against other businesses doing the same thing, preferably the same size of business, in the same geographic location. This will yield the best comparison.
Where do you find this industry information? Many businesses belong to trade associations or mastermind groups. That’s a great place to start! Two free resources are the SBA and BizStats. There are other, more detailed paid resources as well, we use BizMiner.
Once you have the industry numbers, you can compare them to yours to see how much potential additional cash flow is hidden in your business. For a more detailed analysis by lever, check out our related articles in this series:
If you would like a FREE industry comparison for your business, schedule a no-obligation consultation. We promise, no pressure, just information to help increase your cash flow so that you can have a better business, and a less stressful life!