While the financial health of your business is not always determined by the amount of cash you have on hand, having cash available is crucial to your business’ operations. Operating activities, such as purchasing inventory or paying bills, often occur before your business receives payment from customers. It is important to optimize your business’ cash flow, as cash often must be used before it is received.
Luckily, by improving a few operational processes, you can manage cash more efficiently and reduce the amount needed to operate your business. Here are a few tips and strategies to maximize the efficiency of your business:
1. Strategically Manage Your Inventory
Many businesses make the mistake of tying up their cash in inventory. Implementing a just-in-time inventory system or reducing the amount in stock can reduce your inventory holding costs.
One strategy is to implement a 10 per cent reduction in inventory. This can be accomplished by:
- Aligning your on-hand inventory with projected sales by evaluating current customer demand and projected sales for each product.
- Optimizing your order cycles and quantities by taking advantage of beneficial pricing, or reducing the amount of inventory stocked.
- Minimizing inventory by shipping slow selling and expensive items directly from the manufacturer to the customer.
- Eliminate obsolete and slow selling inventory.
By implementing a 10 per cent reduction, you reduce the number of days your product is in inventory, allowing you to reallocate these savings to other operating activities.
2. Collect Debts Sooner
Delayed payments are the worst enemy of any business. By decreasing your collection period (the time it takes to collect payments or debts), you can avoid cash crunches and enjoy better cash flow, allowing you to invest in other initiatives. While managing your collection period may sound complicated, it can be as simple as ensuring invoices are sent correctly and promptly.
Use electronic payment and billing techniques to save mailing time, costs and to reduce your cheque float time. By using electronic payments and billings, your business can process invoices promptly and shorten your collection period.
3. Negotiate Your Payment Terms
Did you know that your payment terms with vendors and suppliers can be negotiable? Many vendors and suppliers provide financial incentives or discounts for early payment. Negotiate your payment terms so that they align with your collection terms, and structure your payment strategy to maximize discounts.
Improving the operational efficiency of your small business can seem daunting, but by implementing a few simple strategies, such as reducing inventory and facilitating getting paid sooner, you will improve your business’ operations.
Want to know more? Take advantage of Small Business BC’s wide selection of seminars for entrepreneurs and small to medium-sized business owners. Space is limited, so don’t miss your chance to register today.
Plus, don’t forget that you can meet one-on-one with an expert to get specific information that applies to your business by booking an appointment with Small Business BC’s Ask the Expert service now.
You can also find more information on managing your business’ finances with Loren Nancke & Company, CGAs and Small Business BC’s TaxSense – Accounting and Tax Kit for New Ventures.