Variables like profits, costs, revenues, and expenses can make or break a small business. When these variables are not aligned sustainably, they threaten business survival and growth. For smaller businesses, the margin for error is typically far lower than that of a larger or enterprise-level organization. The main driver behind this is access to a much smaller pool of funds than larger firms.
To maximize the available monetary cushion, small firms often have to cut costs at every opportunity. This can mean anything from switching to decentralized recruitment to scaling back their internet services. With inefficient cash flow management, even the best profit projections may not be able to save your firm. Boosting your cashflows and making the right moves to minimize inefficiencies, however, may help your firm grow far more sustainably. Here are 5 key ways to accomplish this:
Revisit and Refine Product Pricing
One of the biggest contributors to cash flows is revenue levels. These tie in with product pricing. Where product prices are too low, your firm will probably have more sales. However, the sales volume does not generate enough revenue to cover its costs or show a healthy profit. On the other hand, where the price of the product is too high, it will likely not generate enough sales, which means lower revenue.
This, in turn, means a business will not have enough incoming cash to meet its costs of production, rent, business expenses, and so forth. Therefore, one of the first tips for improving cashflows is to revisit product pricing. This will usually follow an examination of your costs to sell, including manufacturing, labor, material, carriage, and so forth. Look for inefficiencies that could be driving up the final price too high. Alternatively, examine costs that you have not accounted for but are still part of your manufacturing costs. Finding the right balance between overpricing and underpricing is essential for healthy cashflows and survival.
Invest in Newer and More Reliable Equipment
Another item that could add to inefficient cashflows is often obsolete or unreliable equipment. Understandably, most small businesses don’t have access to funds for extensive capital expenses. However, too many make the mistake of keeping older equipment and machinery running long past its useful life.
On the face of it, this may be far cheaper than investing in a new replacement. But you are bound to find inefficiencies in the maintenance and running costs for older equipment and machinery. It is far more likely to break down, hence you’ll be spending a lot more on repair and corrective maintenance. It may also be far more inefficient, meaning it wastes more fuel and/or material compared to when it was new. Even if an obsolete piece of equipment runs perfectly fine, newer iterations are far more efficient than older ones. Simply because of the better technology they use.
Observe Incentives and Penalties for Payment Timelines
To do business, you will often sell on both cash and on credit terms. Cash payments are ideal since they create an immediate inflow of funds. But the business world typically relies more on credit sales. This is far more effective at generating more sales, especially when they come with suitable payment periods. However, it is very important for buyers to stick to the payment timelines. Or, to put it differently, late payments are undesirable, while early payments are always welcome.
To ensure greater adherence, it may be a good idea to offer incentives in the form of discounts to buyers that pay for a credit sale earlier than necessary. Conversely, it may become essential to impose a late payment penalty for buyers who make their payments after the stipulated dates. This will encourage credit buyers to clear their dues early on and discourage late payments. Or, even if they do make a late payment, you gain additional cash inflows based on the associated penalty.
Monitor Marketing Spend and ROAS
It is not enough to create a product or service to generate revenue. You will still need to create a need for it, reach out to the right audiences, and create a stronger awareness of your brand and its offerings. This is where marketing will be your most useful tool. Marketing and advertising help you reach out to interested individuals and encourage them to convert into regular buyers. However, as a small firm, you still need to track the efficiency of the funds you allocate to your marketing and advertising budget.
In other words, you need to monitor the impact of every dollar spent on marketing and advertising. A close examination of your marketing spending and the results it generates can help you identify the optimal use of the overall marketing budget. And it can also help you isolate and discard tactics that are wasting far more money than the sales they generate.
Re-Evaluate Long-Term Vendor/Supplier Commitments
Finally, the best way to improve your spending is to renegotiate your long-term contracts. See if you can get a better deal or a lower price from your materials supplier. Work on getting a lower interest rate or more favorable payment structures from lenders. If you run a lending business, ask your mortgage staffing agency for a better offer on the positions they close. These contracts are going to be a long-term obligation. So, it only makes sense to revisit them in the context of minimizing how much you spend on them. If there is any wiggle room that works in your favor, don’t hesitate to use it!