good cash flow
business finances

12 Ways To Dramatically Improve Cash Flow

It takes cash to grow a business. Everyone knows that. But, not everyone is effective at improving cash flow.

Here are 12 ways to reduce your cash cycle and improve your cash flow. You do not have to resign yourself to the false belief that, “well, this is just the way it is in my business.” Because it doesn’t have to be.


Ways Your Business Can Improve Cash Flow

Have your available cash reported DAILY. Chart it against accounts receivable and accounts payable weekly. You’ll learn so much about your business when you see how the cash is flowing on a daily basis.

If you want to be paid sooner, ask. Most firms and governments will pay considerably faster or even prepay if asked (sometimes asked repetitively).

Give value back to customers that pay in advance or on time. Don’t be shy about asking for your payment at the time of service.


Invoice Quicker & Follow Up

Get your invoices out quicker. Make sure invoices are timely and followed up.

One company hired an extra person to focus on invoicing. This person called clients to proactively find out how they wanted their invoice structured, and to make follow-up phone calls.

In addition, they change the color of their invoice from the standard white to blue so it is noticed in the huge pile of invoices sitting on the desk.


Understand Your Clients Better

Understand why your clients are paying later – many times there are recurring mistakes on the invoice or the invoice is not structured to make it easy for the customer to reconcile.

Time your billings to coincide with your customers’ payment cycles.

Pay many of your own expenses with a credit card so you can play the float and get your own customers to pay by credit card.

Help your customers improve their cash so they can pay you – offer them leasing options, for instance.


Complete Projects Quicker

Shorten product and service delivery cycle times. The quicker you complete projects, the quicker you get paid.


Provide Valuable Offers With Improved Margins

Have such a valuable product or service that you have some leverage with your customers to pay sooner. Of course, reducing the cost of goods helps improve margins and profit, which improves cash position.


Reduce Your Cash Cycle

Every business I’ve worked with could dramatically improve its cash flow. Reducing your cash cycle almost always leads to much greater operational excellence and customer service. You don’t have to cheat your customers or suppliers to achieve better cash flow.

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critical mass spending and saving money
business finances

Understand Critical Mass and Build a Self-Sustaining Business

A business is a living thing, and living things change. Like trees, your business is either growing or it’s dying. It’s dynamic and it’s changing. It may be because the economy forces it to, or because customers need change, or because employees change, or because new products and services enter the market, or because a new competitor enters the market. There could be a dozen reasons. But those changes occur, and you may not be aware of them at first. They are often hidden. If the changes are bad, and you’re not on top of them quickly enough, they can destroy your business.

One of the best ways to identify how things are changing in your business is to be plugged into the numbers. When you plug into the numbers you will have a better understanding of what cash flow is and figure out in advance where it’s going to come from.

If your goal is to build a profitable business, here's ideas on how to measure your progress...

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business break even point
business finances

Why You Need To Know Your Business Break Even Point

Do you know your break-even point? As a business owner, what keeps you up at night? You’re probably snickering at that question simply because the list of things could go on and on. Well I’ve had the opportunity to ask that question to business owners many times, and the most prominent answer is cash flow, or should I say lack thereof.

This Is Good To Know

So wouldn’t it be good to know at what point during the month your business achieves the breakeven point? By the way, breakeven is when total revenue equals total costs. After all, up to the point in the month where your business achieves breakeven you haven’t earned a dime of profit yet. All your money has gone to just pay the business operating costs.


Break Even Point Formula

Here’s a simple formula to calculate your business break-even point…

Here’s the deal with breakeven, the later in the month it takes your business to achieve breakeven the greater likelihood that profits are going to be low and cash is going to be tight.

And in some months you might even experience a loss. Then low and behold, a few days later a new month begins and you start all over again paying costs to keep your business operating.

And there’s not a darn thing you can do to change the outcome of the previous month. So yes, breakeven, profitability, and cash flow lead to some very restless nights.


Manage Your Business By The Numbers

Now, I’m a big fan of managing a business by the numbers. And there’s a fairly simple calculation you can do that will give you an idea of the amount of revenue your business needs to generate to cover costs and achieve the breakeven point.

To calculate your breakeven you will need your Profit and Loss Statement with year-to-date figures. You will then divide the year-to-date figures by the number of months it represents to get the monthly average expenses. Using the average will minimize the effect of any unusual expenses in a single month.


Fixed Costs vs. Variable Costs

You will also need to be familiar with what are the Fixed Costs – these are expenses paid each month even if you don’t make a single sale, and also the Variable Costs – these are expenses directly related to the products and services you deliver.

Hopefully, your bookkeeping has already separated these two types of expenses, otherwise, you’ll have some additional work to do. Now with data in hand, you can use the following formula to compute your business breakeven point for an average month.


Your Contribution Margin

First, you calculate your contribution margin. You do this by taking your Total Income, subtracting your Variable Costs, and then dividing by Total Income. Here’s a simple example… you have $50,000 of total income, you subtract $10,000 of variable costs, then divide by $50,000, and your contribution margin is .80.


Your Break Even Point

Now to calculate breakeven, you take your Total Costs and divide that by your Contribution Margin, and you now have your breakeven number, which is the total revenue you need to cover total costs. Here’s how it calculates… assuming you have $35,000 of total costs and divide that by your contribution margin of .80, and your breakeven point is $43,750.

Now taking it one step further, assuming there are 20 business days in a month your business generates $2,500 of revenue per day. Divide your breakeven point of $43,750 by $2,500, and in this example, the business will achieve breakeven in 17.5 business days.


Know & Track Your Break Even Point

So there you have it, a simple formula to help you calculate the breakeven point for your business. Go ahead and calculate yours. It may not be where you want it to be, but knowing it and tracking it will lead to much more peaceful nights, and it will also set you on course to implement new business strategies that will make those numbers move.

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