Friday, June 18, 2010

Finding Cash Flow in Offices and Inventory

Small businesses (and larger businesses, too) are often looking for ways to save money. Sometimes the cash crunch can cause many entrepreneurs and business owners to stop thinking creatively about solutions to their cash flow problems. Issues weighing on the mind seem to cause one's brain to freeze up and spend 90% of the time focusing on the issue and 10% on the solution. This, of course, can lead to frustration and desperation. So I'm here to help you think clearly about what to do to help your business find more cash flow for its day to day operations. (And thus mitigate your stress levels!)

If you own a business that has more than one location, determine how much income each location generates. If one or two locations generate 70-80% of your business, strongly consider closing the other locations. You will save the overhead costs for that location (rent, utilities, etc.). If you really believe you need that location despite not obtaining much business from it, consider establishing a mobile venue or partnering with another business that has a location near the one that you may close. You may be able to make use of their office on an occasional basis or rent a small area in their warehouse – whatever your company needs. Saving on overhead helps you convert more of your costs from fixed to variable. Variable costs are much easier to manage than fixed costs, especially when cash is tight.

If you keep inventory, make sure what is primarily stocked in your inventory is what is actually selling. Inventory takes up space that you can make better use of if there is no turnover of that inventory. Most products have a shelf life. Therefore, if portions of your inventory are not moving and the lack of movement is not due to poor marketing or selling on your part but due to a drastic drop in demand for those items, sell them at a deep discount to clear it out.

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Wednesday, June 16, 2010

Find Cash in Your Sales Operations

To find additional cash flow for your small business, look at your sales. That may seem obvious but I don't mean your actual sales. I mean your sales process. If you are looking for ways to pull more cash out of your operations, consider doing the following:

  • If you use salespeople, make sure their commission structure is properly set up. First, you should only pay salespeople their commissions once payment has come in. So salespeople, who have the relationship with your customers and are sometimes loathe to jeopardize this by pursuing collections, are motivated to follow up with their customers to ensure payment was made. For example, if the customer has terms to pay in 15 days, state that commissions will be paid on the 20th or 25th day and ONLY if the customer paid.

  • Second, you should either set maximum discount rates or make sure that commissions are tied to the gross margin on the product or service sold. If you tie commission to gross revenues, you could end up only breaking even or worse, losing money, on each sale. By basing commission on gross margins or, even better, having a sliding scale with a higher commission paid for higher gross margins, you ensure you make money with each sale.

  • There should be a time limit on the customer payment. If the customer hasn’t paid within 90 days, the commission should be voided. Pursuing collection of unpaid invoices costs your customer money. You should not pay for your salesperson’s judgment errors. If the customer doesn’t pay, you don’t pay the commission, thus saving your cash.

  • If you pay salespeople a base salary and a commission but the business has dropped off and you must reduce sales staff, you can utilize manufacturer representatives to sell your product in the interim if your company is a distributor or manufacturer. Most manufacturer representatives work solely on commissions. When business picks up, you may still wish to continue use of these representatives to broaden your geographic reach.
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