In Business, Cash on Hand is Vital to Success
Anyone in business knows that cash on hand is a vital to success. Yet, how much, when and in what form varies depending on a wide range of factors. Is your business seasonal? What do you need the cash for? Where does cash frequently get tied up? How can you get your hands on cash if and when you need it?
The point is that you want to be fully aware of how cash flows “in” and “out” of your business. To do this, here are 6 tips for how you can maximize cash on hand in your business.
- Payment Terms | What terms do you offer your customers when paying for goods. If you’re a retailer and people pay immediately upon purchasing, keep an eye on how many use cash versus credit and debit cards. Card purchases represent interchange fees that can eat into profit margins and delay when you actually receive the cash. If you offer payment terms, understand any quick pay discounts, such as 7% 10 net 30. This example means that you eat 7% into your margin, but get the cash on hand 20 days earlier. If this means that you can use that cash to generate more revenue, the equation may be worth it. Either way, you want to know and choose wisely.
- Seasonality | Does the nature of your business rise and fall at different times of the year? If so, you want to know this rhythm and be prepared for having cash on hand when you need to gear up to take advantage of peaks, and have enough on hand to sustain during slow periods. Invoice factoring financing, credit lines and merchant advances may offer tools for helping you through these cyclical times.
- What’s the Money For? | As ridiculous as it may sound, many people think they need to raise capital when cash on hand is readily available to support needs through increased sales and healthy profit margins. If you have a solid grasp on both, than there should be cash on hand through this approach to support investment in growth. In fact, over 85% of small businesses launch without any outside source of capital.
- Where’s the Money? | Knowing where your cash is getting tied up is also important. Are you heavy on inventory that it not selling? The cost and space used can represent a cash drain. If you’re in the service industry, how long does it take for you to get paid? We routinely recommend to our clients that they require an advance deposit of every job that covers breakeven. This way, you have the cash on hand in advance to allocate the necessary resources to get the job done. When the final payment comes it, it goes straight to profits.
- Spend Conservatively | As your business grows and you begin to make more money, it can become tempting to spend more. This is a trap many people fall into. With more money, new equipment or a higher salary seems easily affordable. However, economic tides can shift quickly. If you don’t need it, don’t buy it.
- Maintain a Reserve | Uncertainty is a part of life. Add to this increased global competition, climate change, and economic volatility and you have a perfect storm for expecting the unexpected. To be prepared, calculate how much cash on hand is need to sustain your operation through a period of time relative to your industry and your needs.
If you were a boy scout or girl scout in your earlier years, all of this makes total sense. The key is to be prepared. As a result, you’ll enjoy the freedoms and competitive advantages that having cash on hand offers in managing and growing your business.