My column from this week’s Tennessean:
A previous column examined reasons why managing cash flow is critical in today’s tough economic times.
Remember, there are some basic steps that can be taken to help ensure that cash will continue to flow into your business in a consistent and timely manner.
The first step to bolster cash flow is to improve operating profit margins. In today’s economy improving productivity is the best strategy for improving margins.
Generally, in a small business productivity can be improved through one of two means. First, focus on improving the utilization of your physical resources. Idle equipment and space present an opportunity to improve sales without adding to fixed costs. Second, push for greater productivity from your employees; you need to find ways to get more revenues from your current staff.
It is wise to bring employees into this planning. Be honest with them that times are tough and that if productivity improves it helps to protect everyone’s jobs. They will often have the best ideas on how to improve productivity.
The second step is to make sure to target better customers to increase sales. The tendency in a down market is to chase any and all customers. But some customers are definitely better than others. Focus on customers who have been stable and reliable in their businesses. Spend marketing efforts on keeping these customers happy and loyal.
It’s cheaper to keep the customers you have than to chase wildly after new ones. Also, when you pursue new customers go after those who will give you higher profit margins.
The third step is to cut overhead. It is your enemy more than ever before. By lowering your overhead it lowers your break-even point, which is critical if sales soften.
Cut out the extras
Look long and hard at every non-operating and non-revenue generating expense. Agonize over any addition to overhead such as more space or more administrative staff. Get back to your bootstrapping roots.
Finally, your customers are also feeling the impact of these tough times so their buying behaviors will change. If you offer credit to your customers, it is important to keep a close eye on accounts receivable. Stay on top of it; don’t wait too long to take action if a customer is slowing down payments.
You may have to put more pressure on them to get paid on a timely basis. Even good customers who get behind on payments should be put on a cash basis for future sales. As much as you might want to help them out, you are not a bank.
How to develop a clear plan for your cash once it starts to build will be the topic of my next column in this series.
