Cash flow is the lifeblood of any business. Without it, the enterprise cannot pay its bills, compensate its employees, reinvest in growth, and serve its customers. I’ve encountered many businesses with positive revenue growth but they ended up in the red at the end of the month. Here are three ways that owners can optimize their cash flow to operate and expand their businesses.
1. Track Cash Flow Daily
We live in a data driven world. It is important to know how your business is performing so that you can achieve your organizational and personal goals. The days of tracking your profits and losses in a notebook or on an excel spreadsheet are long gone. There are several inexpensive, cloud based solutions that will enable you to record daily and weekly financial information to keep you on track.
2. Manage High Risk Customers
The second way to optimize your cash flow is to manage high-risk customers. One of the biggest drains on a business’s cash flow is a slow paying customer. You can mitigate this risk by getting up front payments, establishing retainers, and offering discounts to customers who pay early.
3. Segment Your Customers into Tiers
The third way to optimize you cash flow is to segment your customers based on their profitability and average time to pay. I suggest using tiers-green, yellow, and red. While you always want to treat each of your customers well, you want to make sure that you provide your best customers with the highest level of service that you can offer. Separating customers into tiers is the cornerstone of customer relationship management. Our goal is to move customers in the lower tiers, yellow and red, into the highest tier, green. It doesn’t always work out the way we’d like and we may have to fire some customers. And that’s okay. We can only provide the best possible service when everyone in the supply chain is on the same page.
Working with a business advisor to design and implement a system will produce numerous dividends. Once an effective system is deployed, you will receive actionable information on performance and profitability. This data will empower you with the intelligence to make better decisions, reduce costs and maximize profits to reach your personal and professional goals.