Managing Cash Flow For Improved Profits
Cash flow — how much money is flowing into and out of your fast lube business — is an easy concept to understand. Still, not every owner is aware of the impact cash management has on the bottom line. That’s because the importance of managing revenue is far easier to recognize in some types of businesses than it is in others, but skillful cash management is critically important in every business from the smallest to the largest. Losing control of money can generate far more financial headaches than temporary red figures on the bottom line. On the other hand, a sensible cash management system can provide a comfortable cushion during those inevitable slow times when the phone isn’t ringing and customers aren’t coming in as often as you’d like.
Here are nine powerful techniques that can help you improve your cash flow and net income right now:
• Never allow your money to lie idle.
If you don’t already have one, open a money market account at your bank and ask to have it linked to your business checking account for telephone or online transfers.
Deposit all of your daily receipts into the money market account where they will immediately start drawing interest. Never deposit receipts directly into your checking account. Keep a minimum balance in the checking account and transfer cash by phone or online only as needed to cover checks written. The banks have made this technique so easy to use that there is no longer any reasonable excuse for not using it. While even money market interest is anemic now, interest rates are likely to start climbing soon and you’ll be set to benefit when they do.
• Don’t be in a hurry to pay your bills
There’s good reason why checks are slow to come in from people who owe you money. It’s because hanging on to cash as long as possible keeps that money available to draw interest.
That’s why it’s important for you to set up a system to pay your bills just before they come due. It’s easy to do, and it moves you up another rung on the ladder of professional cash management.
Don’t jeopardize your credit standing by paying bills late. Pay your bills just before they’re due — not before, not after. It’s especially important to avoid late payments on credit card bills because of the oppressive penalties that most card issuers have put into place.
• Be aggressive collecting accounts receivable
If you do any of your own billing, never allow those receivables to go untended. You’ve earned that money; you have a right to it; you need it.
Dunning late-paying customers may not be your favorite pastime, but setting up an accounts receivable file and following through on late payments is as important to your financial success as the quality and professionalism of the services and products you offer. If your customers learn you are cavalier about money owed to you, you can be certain they will stretch your patience (and your cash flow) to the limit.
• Diversify to keep cash flowing
This is an important strategy when business is off and revenue is down. During slack times, any income is better than no income. Consider offering a variety of products and services during slow periods at sale prices that do not satisfy your usual parameters of profitability. That approach makes sense by providing work to help smooth out the inevitable and costly ups and downs of cash inflow.
• Maintain a cash cushion
Try to keep enough cash in interest-bearing accounts to cover normal operating expenses for three to six months. There is nothing like the peace of mind and self-confidence that comes when you don’t have to sweat out next month’s rent or next week’s payroll during a business slowdown. Also, keep in mind your cushion money is making money for you in those interest-bearing accounts.
• Develop a personal relationship with your banker
Handling money is a banker’s job, and most are very good at it. Even if your business is quite small, it’s a good idea to develop a personal relationship with the manager of your local bank branch. Discuss your financial picture honestly and you’ll likely get some good ideas and a favorable ear should you ever need a little financial help.
• Let your computer help you to manage your cash flow
Trust every aspect of your business, including investments, to your computer. The financial reports and analyses that modern software can produce at the touch of a button can be vitally important management tools for improving cash flow and bottom-line profits.
• Consider leasing
Most financial advisors agree leasing products like cars for personal use is usually not financially advantageous. But business is a different animal entirely.
“The nature of business accounting is such that leasing can be the most sensible approach to many types of capital investment,” said accountant Jay Blumenthal. “It usually makes sense to lease if you will be able to use the cash in your business or in your investments to earn a better return than the cost of leasing.”
Talk to your tax advisor about this the next time you’re considering any large capital purchase.
• Spread the gospel
To do a professional job of managing cash, you must have a steady flow of the stuff coming in; many business owners keep themselves so busy dealing with day-to-day problems that they never get around to putting together an aggressive business-building marketing program.
That’s a serious mistake. Marketing is an essential ingredient in the recipe for growth — even survival — for any small business. Yet, many owners shy away from all but the most obvious ways to promote their businesses. For some, their entire marketing program consists of signage or an expensive ad in the Yellow Pages.
Some time, some place, someone may have bought the necessary equipment and inventory, placed an ad in the Yellow Pages, and sat back while the phone rang off the hook and the customers poured in.
Perhaps, but not likely.
Building a growing and profitable business requires an ongoing marketing program. There is no other way. Competitive prices alone won’t do it. A high degree of professional skill alone won’t do it. As one entrepreneur put it, “You have to tell the world your story. If you don’t do it, no one else will.”
Taken individually, good cash management techniques may seem obvious or inconsequential. However, when you blend them together in a consistent manner, they will form a significant and permanent contributor to your bottom line and your economic future. S
Never deposit receipts directly into your checking account. Keep a minimum balance in the checking account and transfer cash by phone or online only as needed to cover checks written.
Cash flow helps keep a business healthy. Check out these best practices to help ease the stress on your bottom line.