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If your small business never seems to have enough cash even though its revenue is growing, it may be time for some serious cash flow troubleshooting. Here are four areas where changes could boost your business's cash flow.
Some small businesses run into cash flow problems because they don't understand the relative profitability of different customers. If your business philosophy is that any customer is a good customer, perhaps you ought to rethink that view. In fact, if you carefully evaluate your customer list you may find that some customers generate lots of revenue at relatively little cost, while others contribute little to revenue but, because they demand a disproportionate amount of time and/or are slow payers, are costly to maintain. Either eliminate the latter or charge them more to offset the squeeze they put on margins and cash flow.
Accounts Receivable Collections
A common cash flow problem for small businesses is not making accounts receivable collections a priority. If you are lackadaisical about collections, either because you are disorganized and don't track late payments effectively or because you are uncomfortable taking on the unpleasant chore of asking customers with overdue bills to pay up, this habit could be cutting into your business's cash flow and raising its costs. Therefore, set strict collections policies including penalties for late payment, get organized so that you know right away when an account is late, and become disciplined about responding to late payments immediately. Another good collections strategy to boost cash flow is to offer incentives for early payment, such as a 5% discount on bills paid within 10 days of receipt.
Unprofitable Products and Services
At some small businesses, unprofitable products or services quietly suck up cash that could be reinvested more profitably elsewhere. Therefore, a useful annual exercise for your small business is to carefully review its portfolio of products and services with a goal of identifying those that are profitable and generate cash and those that generate no or low margins and are cash hogs. Admittedly, this can be a difficult process, since some seemingly unprofitable products or services are critical for customer support, as part of a full-service strategy, or for other business reasons. Even so, a rigorous periodic review could enable you to weed out cash users that no longer contribute to your business's success.
Small businesses sometimes are reluctant to raise prices even as costs go up for fear of losing customers. If your small business has not increased prices for more than 12-24 months, take a hard look at where they stand relative to competitors' prices and to the business's cost structure. You may find that your customers are very understanding about a price increase, since you have held the line on pricing for some time, and that higher prices could do wonders for your business's cash flow.
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