Cash flow management made easy

Many businesses both large and small seem to be having major problems with cash flow these days, and some are even going bankrupt because of this alone. Even if the business is otherwise healthy ad has plenty of customers, and a high profit margin per unit sold. Unless the cash flow is healthy as well, then it could well mean that your business is in real trouble.

The main problems seem to be that more and more businesses these days are offering some sort of deferred payment or credit option. Which means basically they are buying stock, which is being sold and then not paid for for sometimes over a year by the customer. Meaning the business can easily run out of money through something as simple as a high volume of these type of sales at one time. This means the business has to have much more starting capital, and wont see a return or any profits for usually the first few years of operating, and may have to build up a line of credit with their suppliers as well, which is hard to pay off if interest is added.

For example if you own a shop and you want to sell someone an energy drink for $1.00. As soon as they have paid you you have made a profit on that sale. Lets say for ease of the math that you made 50 cents, or %50 profit. So if you sell 500 cans in a week then you have made $250. However another customer comes into the store and this time says that they will pay you for 500 cans at the end of the month. It might seem like a good idea, but then you have to pay the electricity costs, as well as the weekly delivery of stock, and an assistant's wages. Suddenly you have spent $200 keeping the store open, without having made any more money. So then by the time the customer comes back to pay, you have actually only made $50. This principle is basically what a lot of businesses have trouble with.

Famously these types of businesses have been either auto sales or furniture companies, but increasingly more and more businesses are following suit in a model that clearly isn't healthy and doesn't work that well in practice without a steady stream of sales and no major increases at a particular time. There have been a number of buy now, pay later companies that have gone bankrupt recently. The weakness that these businesses have is that if the market takes an unexpected turn, then you very are vunerable.

Businesses of this type need to have a steady stream of customers at all times. Otherwise they will encounter a situation where they are receiving orders and at the same time aren't receiving enough payments from the customers that they had over a year ago, during a slow sales patch. This basically means that the income that they are receiving from a time when they weren't processing many orders, isn't enough to cover the new volume of orders that they are now receiving. This means either turning away business or making some of the orders later then they are supposed to be. The end result of which means that you can go bankrupt because you are stuck with suppliers who want paying to complete orders, and customers who want their orders processed.

Some simple ways to make your businesses cash flow better are to ensure as little capital is tied up in unused stock as possible, and to make sure you get as many customers or clients to pay as fast as you can. Because the faster your clients pay the shorter you will have to wait to make a profit on each unit sold. All the while your businesses fixed costs still need paying.

Keeping stockpiles of raw materials that you need for production might seem like a good idea at the time. However changes in the market can make this an extremely bad idea. Sure if you are lucky, and the price of the raw materials that you need suddenly spikes, then you have plenty of spare to last until prices drop. But if the price were to collapse and fall greatly, then you have in effect thrown your money away. Also a lot of raw materials have a shelf life to some extent. So if you buy up too much then you will end up having to dispose of some of it without using it.

Having said that, it is prudent to keep some small reserves of raw materials around. This can increase the speed of your cash flow in unforeseen circumstances. For example if you have orders waiting to be produced and paid for, but a delivery cut off time is missed. You could potentially have no materials to produce anything with for the next week. So having a small amount stockpiled is always a good thing.

Lastly shortening the length of time customers can defer payments can also help. Making sure you have all your payments collected within a month for example, rather than three months. Will allow you to meet your direct, or fixed costs easier. Fixed costs are the costs that you will pay whether you sell anything or not, and are separate from the production process. These are things like the electricity in your building, the wages of your employees etc.

So for example if you have fixed costs every month of $500 to pay, then you need at least this coming in in revenue every month to make sure you are solvent.Lets say that you operate on a three month credit period for customers. Over the first month you receive $1000 in orders. $300 of which are paid immediately and the rest is deferred for the three month period. At the end of the month you have the $500 to pay, so you are $200 short for the month.

With compounded interest this then becomes $250, and the $300 that you get in paid orders in the second month is almost all gone. It comes to the third month and you are now $450 down in terms of direct costs to pay. But you then receive the $700 dollars from the deferred payment orders from the first month. You have then made $250 instead of the full amount that you would have made had the orders been paid for immediately.