Are you profitable on paper and have no cash in the bank? 7 ways to tackle the problem that kills 1 out of 4 small businesses

At CFO Connections, we help business owners feel less anxious about time and money!

It is three days before payroll and you are having a hard time coming up with the cash to pay your employees. You know your business is profitable so how is it that you don’t have the cash to meet your obligations. I hear this a lot from bankers, business owners and general managers.

It all comes down to managing the timing of cash inflows and outflows. Here are 7 strategies to maximize the conversion from profit to cash.

  1. Get paid quicker! Try setting up payment terms to incentivize customers to pay early. Also, actively monitor customer balances and stick to your credit policy. Another consideration is to develop business relationship with un-creditworthy customers who most likely would be required to prepay for services or products because it is less likely that they are being serviced by your competitors.
  2. Take advantage of payment terms! Depending on how strong your cash position is, you should consider either utilizing the full credit term provided by your vendors or pay your vendors early to get early payment discount.
  3. Watch your inventory level! If your business has inventory, it is especially crucial to watch for excessive inventory level. If you just landed a big sale that requires you to purchase additional inventory, think about requiring the customer provide a down payment against the inventory purchase to relief the burden on your business’s cash flows.
  4. Buy or finance? Consider buying appreciating assets such as real estate and finance or lease depreciating assets such as trucks, machines, etc. to keep more capital in the business. Consider utilizing a loan that matches the useful life of the asset and make sure there are sufficient cash flows to service the debt.
  5. Plan and monitor! All businesses should use cash forecast for at least 12 months on a rolling forward basis. It is also important to monitor the results, update as conditions warrant and have a plan B to address shortfalls well before they occur. Have you considered a line of credit from a financial institution? How about alternative financing such as asset based lending (ABL), receivables factoring, or purchase order financing, or a combination of the two?
  6. Reinvestment vs. return! It is natural for business owners to want to receive cash flows from the business as a return of their investment. However, depending on the maturity of the business, profit distributions should be balanced with reinvesting in the business, paying down debt, and improving resilience.
  7. Crunch the ratios! Are you monitoring the KPI around cash flows management? Do you know what your debt service ratio is? How about your liquidity ratios?

At CFO Connections, we have experienced CFOs who have helped business owners feel less anxious about time and money. Don’t let your business become that 1 out of 4 businesses that failed. If you are interested in learning more about these strategies and how you can implement them in your business, give us a call at 813-508-5846 for a complimentary consultation or e-mail us here.