Introduction
There's not a single business out there that doesn't need to improve cash and returns. In fact, most of them would do well to re-evaluate their strategies on how they're currently making money. It's one thing to bring in revenue; it's another thing entirely to make sure you're getting the best returns for what you've invested in your business. Here are seven ways you can optimize your cash flow and increase the amount of money coming back into your bank account at the end of each month:
1. Increase Price
This is a simple solution to increasing cash flow. You can increase your price by a small amount, or even a large amount, depending on where the market stands for your product or service. Increasing the price of your product or service often yields more profit because it allows you to charge more per unit. This can be effective, but remember that raising prices too much may cause clients to switch over to other companies that offer similar products at lower prices. To prevent this from happening and still increase revenue through an increased price on your item or service, try offering additional benefits with each purchase (such as free shipping).
Many firms have had success with loyalty programs to prevent customers from switching to other providers. A few examples with which you are no doubt familiar: membership fees, points programs, and frequent flier miles. Some companies have begun charging annual memberships upfront instead of in monthly installments. You can still choose to pay monthly for access to their services, but they sweeten the deal by offering 10-15% discounts if you choose to pay the annual amount. Most people want to take advantage of those savings, so the companies using this model experience a tremendous surge in cash by doing it this way.
2. Sell More Volume
If you sell a lot, you can scale. It’s simple math: if you make $100 off one transaction and $1,000 off ten transactions, then your profit will be higher if you sell the same amount of product but do so 10 times instead of just once. This is why selling online is so popular—you can increase your revenue without having to increase your overhead costs by hiring extra staff or maintaining a brick-and-mortar store location.
Selling online allows you to reach a larger audience and sell your products to people all over the world. If you’re selling something that is specific to a region or country, then it may not be worth it to try and expand. However, there are no geographical boundaries if you’re selling something like clothing or accessories (albeit there may be some customs and regulatory factors).
Having a sale is a great way to increase cash. If you can offer a buy-two-get-one or something like that, you’re moving more volume and bringing in more revenue despite the fact that the profit per unit may be less. If you normally sell a unit for $5 that costs you $1 to make, maybe 10 people will buy it making you $50 minus $5 for COGS giving you $45. If you sell that same unit on a buy-two-get-one sale, you make $100 minus $30 COGS giving you $70 on those same 10 customers. Here’s the kicker though, typically more customers will buy when there’s a sale like a buy-two-get-one vs. paying full price. In fact, some customers take this opportunity to stock up. In reality, you might have triple the customers during a sale like that making it $300 minus $90 COGS leaving you with $210.
3. Negotiate to reduce COGS
You can try to negotiate with your vendors and suppliers to reduce the cost of goods sold (COGS) of your raw materials and direct labor. This is especially important if you’re a startup, where every dollar counts. Try asking for lower prices on products and services, as well as a volume discount. If you’re buying in bulk, ask for better payment terms or even free shipping!
It’s always a good idea to have a few preferred vendors waiting in the wings. If you keep primary, alternative, contingency, and emergency suppliers, you can avoid supply chain issues for one, but you can also use their competition for your business to keep them honest and receive the best price at all times.
4. Reduce Operating Costs
Operating costs are the expenses associated with running your business on a day-to-day basis, from utilities and office supplies to raw materials and labor. These costs can be reduced by:
minimizing waste
ceasing other unnecessary expenses
outsourcing
changing suppliers and vendors
changing processes
changing equipment
relocating to a different location
The goal is to reduce your operating costs while maintaining or improving the quality of your products and services. If you are able to reduce your operating costs by 5% and increase revenue by 10%, that’s a 15% improvement in profitability. This is why many firms choose to invest in outside consultants to assist them in achieving these savings. The cost of using a consultant is dwarfed by the amount of time and money they can save your organization.
When you are attempting to reduce operating costs, be sure you don’t skimp on safety or water down your culture. Human capital is one of the most important assets for your company. Lawsuits from people getting hurt on the job or seeing your team turnover because of dissatisfaction is a quick way to wipe out any improvements you had hoped to make through operating cost reduction.
5. Collect Receivables Faster
To drive down the age of your receivables and increase cash flow, you can use a collection agency or credit card processor. This isn’t right for every business, but if it makes sense for yours, consider giving it a try. You can also incentivize customers with an “early pay” discount so you don’t have to wait the full credit term (or in some cases longer). A popular term for this is 2% net 10, meaning customers can receive 2% off the bill by paying within 10 days instead of the typical 30, 60, or 90 days.
Another way to collect faster is to incentivize your team members to collect on time. If someone owes you money and they know that you’re going to charge 10% interest per month if they don't pay up in time, that person might be more likely to pay quickly so they don't get charged the extra fees.
6. Reduce Inventory
Keeping inventory to a minimum is good for your bottom line, and it’s good for your business. Inventory can become obsolete when it has sat on shelves too long or if you don't have the right amount of product in stock to meet customer demand. When inventory isn't needed anymore, you'll want to sell it off quickly so that you can justify buying more items when they're needed. That's where technology comes in handy: by using both software and hardware solutions like barcode scanners, RFID tags, and other devices that track the flow of goods through your supply chain; you can reduce inventory levels while still maintaining enough product on hand at any time.
Fight the urge to purchase large quantities to receive the few points “tier discount”. If items aren’t selling through quickly, you have to think in terms that you’re now paying to store the excess inventory. Every unit has an associated cost. The most obvious mistake is when companies run out of warehouse space and end up procuring additional space to house their excess “discount” items.
When this happens, it doesn’t matter how many pennies you saved per unit, it’s likely thousands of dollars are needlessly leaving the company each month because of that mistake. Even if you manage to sell all of the units over time, you have locked up all that cash in inventory for who knows how long, and the effects of doing so can be massively detrimental.
7. Slow down Payables
When it comes to cash, another great thing you can do is slow down your payables. I know this might sound obvious and simple, but it’s a powerful thing—if you pay faster than you collect, that difference will be reflected in your cash flow.
Your suppliers should all have credit terms with you and those terms should be adhered to at all times. If they aren’t, then the impact on both sides of the transaction can be substantial: You may end up paying more for goods than they cost (and therefore not making a profit), or if there are delays in payment then your suppliers might not get paid as quickly as they expect (which could lead to them having cash flow issues).
Conclusion
Cash is key when it comes to an organization’s survival. This article has shown you seven ways to improve cash and returns in business. You may be hesitant to try all of these ways at once, and we don’t blame you. It’s advisable to try one or a few of these methods rather than go all-in adjusting every area simultaneously. A combination of these methods should help you improve your bottom line, and increase the amount of cash available for reinvestment. It is up to you to choose the most fitting options for where your business is today!
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