Your business is now up and running. Now what?
A cash flow should be established as soon as possible, “flow” being the operative word, says Ricardo Palo, a professor at the Ateneo Graduate School of Business. “Money should be used productively to maximize its use and potential,” he says. There are several ways to promote a good cash flow, says Palo.
First, be prompt with your collections. Of course, if your business is retail sales and payment is on the spot, then this isn’t much of a problem. But if your business deals with deliveries, deferred payment and installments, then you should be collecting receivables as soon as you can. “Money out there is not yours yet,” he says.
Don’t delay with your deposits. Additional deposits in your bank account, even if only for a few days, helps with your average daily balance, which in turn helps raise the interest your money earns. When you deposit, be aware of how much you need to save to keep your money earning interest. “Saved money is safe, but saved money also doesn’t make much money,” Palo says. Think of where the extra money could go in terms of investment, and how it could contribute to your productivity and profit. The name of the game is cash flow; saved money doesn’t flow. Save enough, but not too much.
Disburse your money slowly. Of course, it is not recommended to delay your financial obligations. But it is recommended that you pay your bills on the due date rather than settling them as soon as the bill comes, the professor says. “This may seem counterintuitive, but it ensures you have as much cash on you as possible for emergency expenses,” Palo adds. Let’s say you run into a good day and expect to have a killing in sales on a certain day, and you know you can sell more by padding your inventory just for that day. You’d be glad you still have that extra money, since you’ll turn out a profit anyway.
That said, keep in mind that your inventory is not the same as liquid cash. “Accurate forecasts on what actually sells and how much it sells for is smart spending,” says Palo. If, for example, you sell several products (like in a fast food store), determine which items are your bestsellers. “Determine which items make the bulk of your sales and capitalize on that. Minimize and be ready to phase out items that don’t have such a high demand,” he adds.
Determine how fast you can get your inventory delivered. Some specialize in just-in-time delivery and can allow you to purchase on the day you need it. “This makes your forecast more accurate, since you are closer to the actual selling time,” the professor says. “Always be on the lookout for cheaper sources of your supplies, and always be on the lookout for better deals,” Palo adds.
But while you’re at it, never compromise on quality. Make a distinction between low-cost and cheap. “You wouldn’t want to be cheap,” he says.
Keep your competitors within range. Make sure your prices stay competitive. “Obviously you don’t want to price yourself too high out of the market,” the professor says. But dirt-cheap doesn’t always mean you’ll make sales by volume. “Whether it’s true or not, many buyers have been conditioned to think that cheap prices would mean unreliable products,” he adds. If your products are priced too low, buyers might not take you seriously. Offer lower prices, but stay within range of what’s reasonably competitive, the professor says.