Cash in the bank acts as a buffer and can help you better weather the ups and downs you may encounter while running your business. Reserve cash buys you more time if things go wrong, and allows you to experiment and test new ideas without needing immediate revenues to cover your costs.
This article is available to download along with an editable PDF here: Coast Capital Creating Cash Reserves Checklist
Focus on your goods and services
A small increase in price without any fall in sales, or increase in overhead, adds up over time.
Increase your prices
Small businesses may not always charge what things are worth. Regularly evaluate whether prices can be increased by checking your costs and what competitors are charging. If you don’t keep up with inflation, you’re going backwards, so as a general rule of thumb, customers should be paying more each year—unless your input costs are also falling.
Identify services you provide or products you sell that are price insensitive and increase the price by a small amount.
Decrease stock levels
Reducing stock levels can transfer cash directly to your bottom line. You might be able to reduce the stock and raw materials you hold by making better use of online ordering and more efficient warehousing software, so you stock only what you need for the immediate future.
Have a sale
By holding a stock review every few months you may be able to eliminate any redundant products and slow sellers. You may also be able to buy stock from suppliers just a few days before you need it. The money saved can then go straight into the bank. You can sometimes receive large discounts by buying stock or materials in bulk, but always weigh this against the fact that this cash is then unavailable for anything else. This is especially critical when times are tough and you need cash for wages, rent and general running costs.
Stop stockpiling inventory
Many businesses will buy additional inventory in order to have a safety surplus, just in case there’s a sudden increase in demand or a large order comes in. This ties up a huge amount of your capital and drastically reduces your cashflow. Implementing a build-to order business plan means that less of your cash is tied up in stock that is sitting idle.
Manage debtors
Contact the customers who owe you money. Many small businesses feel uneasy about asking their best customers for overdue payments as they fear being pushy might send the
customer elsewhere. But they do owe you money—money that could be spent on growing your business or getting you through a tough patch.
Develop a firm but fair collection policy
Offering alternative payment options, such as taking credit card payments or accepting electronic payments, can sometimes help you collect faster. Customers need to know you will consistently follow up on overdue bills. This is where good accounting systems are essential, because they enable you to quickly generate overdue payment reports or flag them automatically for your immediate attention.
Credit terms
If you offer credit, make sure that your payment terms are clearly indicated on invoices and other correspondence. When negotiating a new contract, remember to include payment terms so your new customer is aware of your expectations from day one.
Reach out to late payers
If a client is routinely late with payments, then it makes sense to call them and ask why. It may be due to a misprinted payment date on their invoice, financial issues, or even customer disputes. Whatever the reason, the only way this problem can be resolved is by first discovering the issue.
Send your invoices out quicker
Consider delegating a responsible person to handle all the invoicing. This cuts down on the chances of misunderstandings or forgotten invoices. Any bills should be sent out as early as possible, regardless of the due date. A client is more likely to pay you earlier if they receive the bill promptly.
Offer incentives for early payment
Encourage early payment by offering some form of value to your clients. This could be a discount on follow-up orders or a small service offered free of charge. However, make sure these incentives are feasible, especially where free services are concerned.
Communication and technology costs
Check regularly to see you’re getting the best deal you can. Two recurring costs for businesses are phone and internet costs. These costs are changing all the time, and usually track downwards. But are your costs going down? Don’t hesitate to change to a cheaper supplier, but make sure the quality and service are equivalent to what you’re currently receiving. This may apply to other products or services too, so apply this practice as broadly as you see fit.
Cell phones and landlines
Review your communication costs now and you might save hundreds a month in future. For example, do you need all of your current landlines? How many mobile phones does the business have, and are they all needed?
Review how you manage online meetings and long-distance calls
If you make lots of long-distance calls, can you lower costs by using VoIP or Zoom? If you’re already using these types of services, shop around for the right plan for your needs. Do you need all the benefits you are paying for?
Use technology
Make and receive payments electronically—saving you time and money and avoiding invoices getting lost or misplaced. Consider point-of-sale (POS) terminals with our Merchant services partner. If you are a service provider (such as window cleaning services, etc.), look into taking payments via your cell phone when the job is complete.
Manage your costs
Even small changes like recycling or reusing materials, (printing both sides of a piece of paper for example) will add up to significant amounts over time. Reducing your costs can be a fast and effective way of increasing the amount of cash in the bank. Look carefully at your expenses to see what items you can reduce or eliminate. Look at each item and ask yourself if it’s really contributing to the profitability of your business.
Review premises cost/benefits
If you own your premises, think about the opportunity cost of the money tied up in the building. How could you use it to build new business opportunities? For example, do you have unused space you could rent out?
Review equipment cost/benefits
If you have equipment, make sure it’s being used effectively. Does your equipment cost more to maintain than it makes? For example, too many vehicles are costly to maintain and may not be generating income.
Cancel unnecessary subscriptions
If you have subscriptions to services you don’t use, such as cleaners, online subscriptions for software or data and servicing of unused equipment, consider cancelling them.
Check staffing levels
If you have staff, examine your staffing levels—particularly if you have a seasonal business. Are there times when you could manage staff numbers better? Perhaps contracting part-time staff during busy times would be more effective than full-time employees. Even if you pay the contractors more and the overall cost doesn’t
change, at least the higher expense will come during the busy periods and not impact your cashflow during quieter times.
Monitor cashflows
Make a record of how much cash is spent on a daily basis and ensure that you are satisfied with the reasons for spending. It will be much easier for you to identify improvements and learn where your cash is going. Use a cashflow forecast to plan for times when you might have extra money that you can save for when you need it.
Looking internally
Cashflow problems are common in many small businesses. Here are some of the ways you can free up spare cash.
Sell unused assets
Do you have equipment that’s underused? If you use an asset only a few times a month or year, then might it be a better option to rent or lease similar equipment when you need it? Many businesses have assets that, if sold, create cash that may be better used as working capital to keep the business going.
Look for alternatives
Do you always need brand-new assets? Sometimes the latest technology can be a business advantage, but on other occasions the newest, shiniest gadget might represent money better saved. Is secondhand office furniture and equipment sourced through auction sites a better option? Could you downgrade business vehicles to save cash?
Improve your cash cycle
A shorter cash cycle can make it easier to manage your money, so consider ways to get paid quicker. Some customers may be willing to pay a deposit or even offer full payment in advance.
Evaluate your business borrowing
If you already have a business loan, is it the right loan for your business needs? Many small business owners make the common mistake of using their line of credit to finance larger capital purchases, tying up a significant portion of their line of credit for a period of time and reducing their ability to use it to see them through short term, day-to-day fluctuations in cashflow and unexpected business emergencies and downturns.
Your borrowing should be reviewed to ensure it is balanced with line(s) of credit available for short-term dips in cashflow, and long term loans for purchasing long lasting assets like equipment. You may want to increase your term loan borrowing to free up available credit space on your line of credit. Depending on the capital purchase, you may also want to consider leasing a piece of equipment, for example, to minimize your regular monthly borrowing payments.
Cash tip!
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Other options to consider when looking at how you borrow include whether to secure the loan, and how you want to pay it back. Securing it with real estate, for example, may offer you a better interest rate and a longer repayment period. Lines of credit also allow you to pay only the interest, while term loans will require you to pay back the interest and principal within a fixed time-frame. Fixed-rate loans help smooth out cashflow, by eliminating fluctuations in payments due to changes in interest rates.
Benefits of using business credit facilities
A simple benefit of an operating line of credit for a business is that it provides flexible access to funds for short-term cashflow needs, helping to manage expenses like inventory or payroll without disrupting daily operations.
One benefit of a business credit card is that it helps separate personal and business expenses, making it easier to track and manage finances. This can streamline accounting, improve cashflow management, and potentially earn rewards or cash back on business purchases.
While you want to minimize business debt, and may prefer to be debt free, borrowing can offer you a means to effectively grow your business and take it to the next level—generating greater revenues far in excess of the costs of borrowing. Just ensure if you do borrow or increase your existing borrowing that you have what you need to manage your business effectively day to day.
The Stuff We Need To Say
This content is for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. You should consult your own professional advisor for specific financial, investment, and/or tax advice tailored to your needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.
