One of the toughest challenges that small to medium-sized businesses face is how to effectively handle their cash flow. According to a U.S. Bank study, approximately 82% of small businesses fail due to the poor management of their cash flow.
Forecast sales and cash flow, budget better and monitor sales performance
As a business owner, you already know that cash is the lifeblood of your business. We have highlighted six typical areas where you can improve cash flow.
Up-to-date information is crucial to the success of your business, especially in the area of accounting. Information concerning who owes you money, how long they usually take to pay, and how much they are likely to spend with you will have a huge impact on how your business orders and pays for its stock or raw materials.
Apart from being valuable and essential to the business’ financing plans, such information will also place you in a stronger and more confident position when dealing with your suppliers. Investing in an accounting system that responds to real-time business activity and is able to produce the numbers will pay dividends in improved cash flow.
As business coach, Ali Golds, explains, “Gone are the days of having to use Excel spreadsheets and paper to record expenses and invoices. Accounting software packages can now be fully integrated with your bank account and, at the press of a button, can update you on who owes what and when it was due.”
Any business owner understands that there is always likely to be someone that owes you money. That money is your cash flow and your business needs it if it is to continue operating. The largest amounts of cash that leave your business usually go to pay your own suppliers.
The better the payment terms you can secure with your suppliers, the less impact they are going to have on your cash flow. Strong supplier relationships don’t just happen overnight and by paying on time every time, you will be putting yourself in a stronger position if you ever need to ask for more flexible terms. From better prices and longer payment terms to smaller minimum order quantities, they can all positively impact on your cash flow.
Just as you need to tread carefully when negotiating with your suppliers, there is also a fine balancing act between customer satisfaction and getting paid on time. It takes a skilful business manager to know how and when to nudge a customer for payment of their accounts.
Thomas Smale, Founder of FE International, states that creating incentives for early payments and penalties for late payments is a sound approach when dealing with invoicing. By applying discounts to accounts paid on time (or early), and charging interest on late accounts, customers will be encouraged to pay on time, every time. According to Smale, “Since not only will more of your customers pay early or on time, you’ll actually be able to save on the time and resources costs of constantly having to confirm that payments have been received.”
One of the most effective tools in helping with cash flow for small to medium businesses is effective inventory management. The best place for your products is not in your warehouse, on the dispatch dock, or in the back of the delivery van. It is on the shelf on your customers’ premises. Every product on your shelves represents cash that could be employed in making more money for your business.
Using effective inventory management software will provide you with up-to-date information concerning the movement of the products through your system at every point from ordering and purchasing raw materials to dispatching and depositing the cash in your bank. Through smoother inventory management, you will be able to hold less stock and produce more accurate cash flow analysis reports.
By adopting a flexible pricing approach, your business will be better positioned to move inventory through the warehouse and onto the customers’ shelves. That equates to more efficient turnover of products and improved cash flow.
However, choosing the right pricing strategy is a fine balance between staying competitive and setting prices high enough to make a healthy profit. This can be especially difficult for wholesalers because not all customers are created equal. You could be simultaneously selling to a range of different accounts such as distribution groups, retailers, and other channels – each one with its own terms and expectations.
The solution is to adopt a sophisticated pricing model that can easily be tailored to different types of customers. With TradeGecko’s B2B eCommerce platform, you can create custom pricing lists for different accounts, ensuring the price is right for every customer.
Using our free wholesale cash flow tool, you can then record order and pricing information per customer, including when payments are due, payment fees, and other details. These details are used to automatically generate cash flow and revenue reports, where you can analyze how account-specific pricing models are impacting your cash flow and make adjustments as necessary.
As a wholesaler, use minimum order quantities to ensure that your products keep moving from your warehouse shelves into your clients’ outlets. The key to success in this area lies in calculating how much differing amounts of products are costing your business by the time they have passed through your supply chain.
Using a system that provides this information about your product and business costing enables you to determine the break-even point. This price is likely to be on a sliding scale that, in its most basic form, will show that the more products you move, the lower that break-even price will be. By applying minimum order quantities at set prices, you will remain competitive while encouraging your clients to purchase more. This means that the goods move off the shelves and the payment finds its way back to your bank quicker as well.
By making improvements in several different areas of your business, you will make a highly effective impact on your overall cash flow. Those financial resources can then be applied to other areas of your business to initiate and drive expansion and improve the all-important bottom line.
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