Your business is now up and running. Now what? Cash flow should be established as soon as possible, "flow" being the operative word, says finance professor Ric Palo of the Ateneo Graduate School of Business and San Beda College.
There are several ways to promote a good cash flow.
1.) Be prompt with your collections.
Of course if your business is retail sales and payment is on the spot, then it 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.
2.) Don't delay with your deposits.
Additional deposits, even for only 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.
3.) 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 just had a good day and expect to make 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, although you'll turn out a profit anyway.
That said, keep in mind that your inventory is not the same as 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.
4.) Determine how fast you can get your inventory delivered.
Some suppliers 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, " Palo says.
"Always be in the lookout for cheaper sources of your supplies, and always be on the lookout for better deals, " Palo adds. But while you are at it, never compromise on quality. Make a distinction between low-cost and cheap. "You wouldn't want to be cheap, " he says.
5.) Shop around your competitors as well.
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 makes sales by volume. "Whether it's true or not, many buyers have been conditioned to think that cheap prices would mean unrealiable 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, Palo says.
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