Cash flow is the bloodline of every business. You need to have a steady stream of sufficient capital to keep the lights on. Having a positive cash flow means that your business has enough money to run its overhead costs and invest back into the business.
Analyzing your cash flow situation is imperative and can help you quickly spot any changes in your business. This will allow you to deal with them immediately, keeping you from experiencing a negative cash flow situation.
7 ways to improve cash flow for retail businesses
1. Review your credit card terms
One of the easiest ways to improve cash flow is to review your credit card terms with your credit provider or financial institution. There is usually a fee associated with every credit card transaction, and these can quickly add up. While these fees are generally minimal, many companies will allow you to negotiate, and reducing them even by a few cents can go a long way in saving you money in the future. If negotiating isn't an option, shop around until you find a rate that's right for your business.
2. Send out invoices promptly and follow up
Most retail businesses typically accept payment at the time of purchase, limiting the amount of time that receivables will sit on the books. However, if your company issues invoices to customers, make sure that you send them out as soon as possible. The faster your customers are invoiced, the faster your business will get paid.
If there is a delay in receiving your payments, don’t be afraid to send out invoice reminders and continue to follow up on unpaid invoices, reminding customers to pay up before their due dates.
For more information, check out our Best Practices Handbook for Accounts Receivable.
3. Cut out all unnecessary expenses
Unnecessary expenses can be hazardous to your cash flow, cutting into funds that could be better used elsewhere. Each month, review your cash flow statements and analyze your business expenses. Ask yourself the following questions:
- Are these expenses necessary?
- Is there a cheaper alternative for these expenses?
Your employees' salaries are often one of the most significant expenses that a business has, accounting for 38% of all expenses. To help reduce your payroll costs, consider outsourcing and save your business the costs of a salary, CPP, and EI.
4. Time your vendor payments well
Timing your vendor payments can significantly help your cash flow. Most vendors offer a 60 to 90 day payment period. Some retail business owners feel that they should pay right away to avoid the chance of late charges, while others wait until the last moment to make their payment. The best method for paying vendors is to time when it's best for your individual business and works well with your current cash flow situation.
If your vendor offers a discount for early payment, take some time to evaluate how much money this will save you and whether it is worth paying early. If the savings are minimal, plan to pay at a time during the repayment period when your cash flow is at its highest.
5. Streamline your business processes
Have you ever taken a moment to consider all of your business processes to see if there is a more efficient method to get things done? There are numerous different ways to be more productive such as:
- Implementing a cloud-based accounting software program to automate your invoicing.
- Using a document management software like Dext Prepare or HubDoc to extract essential information from your documents instead of manual data entry.
By finding different and innovative ways to streamline your processes, you save both valuable time and money on having to hire more staff to do the work.
6. Create a cash flow projection
Even though you will never forecast your revenue with absolute accuracy, it is still important to understand how your business fluctuates. By creating a cash flow projection, you can compare your forecasted revenue to your business expenses to identify potential cash flow issues, giving you time to rectify them before they occur.
Based on your cash flow projection, you can create a budget to manage your expenses better when cash flow is tighter and set aside a cash reserve during busy periods to help cushion you through slower months.
Cash flow projections should be created at regular intervals, giving you visibility on your business's upcoming cash flow situation at all times.
7. Optimize your inventory management
Inventory management is vital to the success of your business. You want to take advantage of bulk order discounts, but at the same time, you don't want to have excess inventory on hand. Finding the balance between these two can go a long way to improving your cash flow.
When placing orders, try to keep quantities small. Identifying the top-selling products will give you an idea of where customer demand is, and these are the items that you should order in bulk to attempt to drive costs down, reducing your per-unit cost.
If times are slow, keep orders to a minimum, determine your economic order quantity, and monitor the lead times for ordering. Also, if you find that you have an excess of slow-moving products in stock, you can speed up their turnover by using sales and other promotions to move them out of inventory as quickly as possible.
Negative cash flow can be detrimental to your retail business and could mean that you don't have the funds required to pay your overhead and operating expenses. Not only does this make it hard to keep your business afloat, but it also makes it nearly impossible for it to grow and thrive.