Cash is king as they say, and one must have enough of it to keep your small business going. But you already know this, and still it is an ever-present issue. Seasonality, receivables, unexpected expenses all can wreak havoc on your cash flow. Let’s take a look at some strategies that will help you manage inconsistent cash flow.
Draconian Expense Cuts: Your revenues aren’t cutting it, but you can cut your expenses. When short on cash, cut expenses deep. In fact, cut 50% deeper than you think you should. This feels like a punch in the gut, but you will heal and feel much better several weeks down the road. Reducing expenses is painful because it often means letting go of employees, or reducing their hours or salary. These are the tough decisions that you have to make if you want to keep going.
Examine your Daily Cash Cycle: Let’s take a look at a fictitious company and analyze their working capital.
Let’s imagine a company we called Nile, Inc. Nile is a vegetable retailer who has the following metrics:
Cost of Goods Sold (COGS) = $365
Average inventory = $10 (they have low levels of inventory in general)
Sales = $1095
Accounts Receivable = $30
Accounts Payable = $30
Here are the key financial ratios we can derive from this data.
- Inventory turnover = COGS/average inventory = 36.5. Nile, Inc. turns over its inventory 36.5 times a year. …
- DSI or Day Sales Inventory = (1/Inventory turnover) *365 = 10 days. …
- Receivables Collection Period = Accounts Receivable / (Sales/365) = 10 days. …
- Payable Period = Accounts Payable / (Sales/365) = 10 days.
So what does this mean? Nile takes 20 days to convert inventory to cash – 10 days to convert it from inventory to a sale and 10 more days to convert the sale to cash. However, since it takes 10 days to pay suppliers, we can reduce the 20-day number to 10 days. Ten days is Nile’s Cash Conversion Cycle. The Cash conversion cycle is an important idea since this means Nile requires 10 days’ worth of working capital (Current Assets – Current Liabilities) to keep its business solvent.
Charge What You’re Worth: I once owned an outdoor landscape lighting business, and from the start, I was worried that our products and services were too expensive. However, once things really got going, the price we charged was high, but was fair value for what we were doing. Know your worth and charge accordingly.
Maximize Your Highest-ROI Opportunities: Not all of your products and services are equal. Some opportunities pay off more than others. Focus on ones with the highest ROI only, even if it wasn’t part of the original business plan. The rest of the time should be spent on minimizing costs. In essence, run a minimum viable product until you can afford to spend more.
Borrow Money if Need Be: Often times the best solution is to start close to home. Friends and family may be one option to consider. Another would be a line of credit from an existing bank relationship or, if the business is sound, seek equity investors. Generally, these three groups are a good way to measure the business’s viability. If they all say no, perhaps it is time to reconsider the business altogether.