How Can Residential Integrators Improve Cash Flow?
Small business owners, especially those in the integration market, have a plethora of challenges to worry about on a regular basis and one of them is proper cash flow management. Cash flow in particular is a unique problem since you could be generating profits yet have no ‘real’ money to take home. How? While profits or revenue generated can be numbers that exist in your invoice that a client has approved, cash flow is a more tangible affair. Only after you see the money coming in can you actually claim having a decent cash flow. Until that point, well, you’ve got nothing.
So, what interrupts cash flow? In integration business, it’s a fairly common thing for the receivables to arrive after a long gap of say, more than three months. Receivables languishing for such long duration can be bad for your business, in terms of both actual profitability and relationships with your suppliers and customers.
Here are five ways in which you can improve cash flow in your business.
1. Follow inventory management best practices
Following inventory management best practices is a key to your success as an integrator. One of the biggest reasons for poor cash flow is making the mistake of holding more inventory than needed. To determine how much you need to store, it’s important that you understand your business cycle, which will help you predict your sales in the coming months as accurately as possible. One way to do this is to go over your previous sales records and chart out the sales trends of your business on a monthly basis. Alternatively, you could also use a just-in-time inventory (JIT) management method, which will help you obtain the inventory just before it’s needed.
If you’re sitting on too much inventory, return the products to vendors or distributors for credit. If the manufacturer refuses to accept the products, you can always try selling them to other dealers.
2. Manage accounts receivable
The chunk of due payments is where most of the cash flow issues arise from. One way to tackle this problem is to give your customers an incentive to make early payments. For instance, you can offer a discount for payments received within 10 days of invoicing. While the thought of discounting your price might not sound appealing, think of all those payments coming in earlier than ever before and how it can help regulate your cash flow. Finally.
You can also reduce your accounts receivable days by identifying those customers who tend to delay payments more often or take the longest to pay. Talk to them and see if you can figure out a payment structure that might work better for both of you. If you’re not able to arrive at a mutually agreeable solution, consider politely declining them further credits on purchases.
3. Don’t forget to manage accounts payable
Making payments earlier or later than the due date can also contribute to cash flow problems. While paying early might leave you strained during bill payments, paying late will have a negative impact as well. Do all you can to focus on making payments on time and keeping your accounts payable up to date.
4. Ask for down payments
While asking for down payment might be a deterrent in getting a deal, it can help you manage your cash flow throughout the project. By getting a system in place such that you require a part of payment in advance, you can prevent the receivables from clogging your cash flow. Since projects in the integration business typically take months to finish, you can also accept payments in installments, if your customer agrees.
5. Get trade terms
In the integration business, you have many opportunities to earn discounts or make delayed payments by vendor permission. Trade terms can be a great way to get these benefits. When you have enough cash, you can make early payments and earn discounts in return. Added over a year’s span, this can lead to some amazing savings. On the other hand, when you’re cash strapped, you might find vendors who offer trade terms that will allow you to pay later. However, remember that not all suppliers provide this benefit and those who do offer them to a select few.
Cash flow can make or break your business, so if you are not paying attention to managing it well, you could be doing some serious damage to your business. With these five tips, you not only prevent cash flow problems but also improve cash flow significantly.