When it comes to cash flow, small business owners often find themselves in a reactive cycle. Each month starts with the hope that they will come out ahead after payroll, inventory purchases, and other overhead. When that happens, all is well with the world.
On the flipside, when they come up short, panic blankets the business as the owner frantically scrambles to make ends meet. This cycle can prove exhausting and demoralizing.
“Instead of letting cash flow just sort of happen, it needs to be budgeted for and actively managed,” says Ted Hurlbut, principal of Hurlbut & Associates, a business management consultancy in Foxborough, Massachusetts.
Managing your cash flow sounds like a great idea, but in today’s tough times, it is possible?
Absolutely, according to Hurlbut. Here are a few of his top tips for maintaining positive cash:
Create a sales forecast
This can be hard to do in the beginning, but after running your business for a few months, you’ll have a good idea of how sales will stack up month to month. If you are a retail shop owner, take a look at your inventory. Which items move quickly? Which items have been gathering dust for a while?
“You really need to have a benchmark for what you think will happen,” Hurlbut says. “Forecast out by month, category and what revenue you anticipate based on history—the more detailed the better. Just write it down on paper. These forecasts can end up giving you the budgets to make purchases for your business.”
Devise an inventory management plan
Once you’ve finished writing out your sales forecast, its time to think about inventory. It’s important not to go overboard when purchasing inventory, says Hurlbut.
“Less is more,” he says. “Lean inventory means that you are not investing precious cash in unnecessary, excess inventories.”
Keep your markups
Times are tough, which means small business owners should consider slashing prices, right?
Major markdowns will only have a negative affect on your cash flow. If you must mark something down, make sure you can recover that loss with the price of other items.
“Manage your markups,” Hurlbut says. “Markups erode when vendors try to raise prices. It is easy not to pass on that cost increase fully and maintain your margins.”
Plan pre-season to maintain margins
Markdowns usually happen for one of two reasons: 1. The business owner is fearful that the customer will not support prices 2. The business owner has excess inventory he or she needs to shed quickly to maintain a positive cash flow. In the case of No. 2, pre-season planning is essential.
“The way to prevent excessive markdowns is a pre-season commitment to lean inventories,” he says. “Take the big box stores as an example. Last year, there was a lot of talk about how these chains were reducing their inventory levels around the holidays. They were trying to protect their margins. The benefit? The cash never left the account, so they never had to mark anything down.”
Manage cost structures
Fixed costs can kill cash flow, while variable costs can help businesses stay in the red. If you have five employees on salary your monthly payroll expenses are considered fixed costs. If instead those five worked part-time or even flex time, payroll would be a variable cost, which is better for the business’s bottom line, says Hurlbut.
Rent and utilities can also be translated into variable costs. “If you are going through a rough patch, talk to your landlord; they may be willing to work with you,” he says. “Also, try to find a different plan from our utility provider. These strategies can free up a lot of cash flow.”
By Katie Morell
Katie Morell is a writer and editor based in Chicago.
Over the past 10 years, Morell has covered topics ranging from business and politics to travel and social justice.
She is a member of the American Society of Journalists and Authors (www.asja.org), and a graduate of Michigan State University’s School of Journalism.