For start-up business owners, one of the biggest -- and most common -- mistakes you can make is to place other business goals ahead of your company's cash flow.
While it's important to spend time on building your brand and generating sales leads, it's downright vital to quickly cultivate a steady stream of what accountants call "free cash flow" -- that is, the amount of cash coming into your company over and above all of your expenses. After all, if you don't have money, you won’t be around long enough to worry about those other things.
If possible, keep 10 percent to 20 percent of monthly revenues on hand because at that point, in most companies, you’ll be able to reinvest into the growth of your business -- from purchasing additional product or service lines to roping in more suppliers or even building up your team when you need to.
Here are five ways to keep cash flowing consistently into your business:
- Know your expenses.
Although discounting -- through coupon sites like Groupon and BuyWithMe or even on your own -- can help you attract new customers, selling anything at a loss won't help you generate a positive cash flow.
My view? Never discount. But if you do, know the costs and impact of what you’re offering and be prepared for the fallout. Among other things, you'll need to know your overall cost basis -- that is, what you paid for something. You should also know your how much you should ideally charge, the cost of your offer and the profit margins on your product or service. How else will you know if your discount has you breaking even or operating at a loss? To do the math, see our break even calculator. - Bundle products and services.
Even though discounting isn't always recommended, adding value is. By creating bundles of products or services, for instance, businesses can inject tremendous amounts of perceived -- and tangible -- value into their offerings for very little cost.
A good example is the maintenance agreements some car manufacturers are now providing with the purchase of a new car. Not only does that type of offer help allay a major concern or frustration customers have -- paying for a breakdown or time lost at the dealership -- it also offers real value in terms of limiting out-of-pocket maintenance costs.
Put more simply, you can increase your price point initially since you've helped lower a perceived risk by offering something as basic as a guarantee. - Create a back-end product or service.
If you know your initial offer to reel in new customers won’t be profitable, find ways to create higher price points on back-end products or services. Perhaps the first hour of catering is free, but subsequent hours shoot up in price. Or maybe an attorney will agree to draft your will for less if she thinks you're a likely candidate for estate-planning consultations in the future. - Encourage repeat business.
If you're in a volume-driven business like retail, landing repeat shoppers is your holy grail for cash flow, profit and growth. In most cases, you won’t start to profit on a customer until the third, fourth or even fifth transaction. For this reason, you need to devote your efforts toward getting customers coming back -- and more often.
Consider loyalty programs, VIP offers and other frequent-shopper programs, which can be ideal vehicles for systematizing repeat business. Also keep in mind that the word "free" is a popular incentive among shoppers, and the costs of funding a freebie may easily be covered as long as you're dealing with excess inventory or low-cost, but valuable add-ons. - Pre-sell products or services.
For owners who want to encourage sales sooner, pre-sell your products or services. You might couch the pre-sale as a way for consumers to plan for their future or get a jump on shopping. You can also offer to take old, outdated products back at a pre-arranged price.
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I am in the printing business and it seems like the best way to get customers is to take their order without them paying immediately.They all want to pay when you deliver the product but then again,they'll negociate to pay a month or two later.It's really killing the business. If you want paying clients,you won't get any clients.And the icing on the cake:you end up with your suppliers going mad at you.I am trying to find an efficient solution to this issue.
Very helpful,thanks for the article!
Oh I wish I could. I really thank you but I do not think this is a right way these days when real income is losing and cash getting thinner I thank you Firozli A.Mulla
Awesome article, Brad. As a start the most important thing is to get paying clients. That means focus on generating leads in order to open the tap for cash flow. Once you have the first paying customer then all the principles spoken about are of absolute paramount importance. remember that cash flow has its origins in paying customers, without which there is no cash flow. One question I do have is an article surefire way to get a paying client.
These are great, practical tips that should help small businesses improve their cash flow considerably! The tip about encouraging repeat business is a particularly powerful idea since having loyal customers is a good indication that your product or service works. Moreover, it helps you identify the kind of market that is responding well to your product/service which can help focus your marketing efforts at the right kind of consumers. Repeat business can also be a good predictor of a revenue cycle, thereby alerting you of the need to increase revenue at any given time. - Kate. For a free business valuation assessment, visit http://www.ebusinessappraisals.com/value-insight/.
Another way to keep your cash flow coming in is to use a subscription based business model. This way you are almost guaranteed the amount of money you have coming in from the recurring billing for each subscription, each month.
Awesome article, Brad. As a start the most important thing is to get paying clients. That means focus on generating leads in order to open the tap for cash flow. Once you have the first paying customer then all the principles spoken about are of absolute paramount importance. remember that cash flow has its origins in paying customers, without which there is no cash flow. One question I do have is an article surefire way to get a paying client.
Valuable post indeed. We have tested different price plans and found out that bundling services is in an excellent way to add value and increase sales, also combine that with 24X7 customer service is definitely the way to go. Our customers never felt they are left in the dark nor being cheated on. Hasan Mirjan Founder/General Manager http://www/rezerv.it
Great post Brad - another area to keep cash flow pumping is to keep inventory at the right level. Bottom performing businesses have nine time more inventory than top performing peers. This is a huge drain on cash flow. Business intelligence solutions that move beyond "what has happened" to "what is the best that can happen" can help significantly. With the evolution of cloud apps, business intelligence solutions are going main stream and are more accessible than ever as simple add-ons to QuickBooks etc...
Cash is truly king! Businesses go out of business everyday because of poor cash planning. I love all the tips and hope that business owners take the time to understand what they need to do to keep their business open. If they are unsure, ask for help! There are a ton of advisors out there - including part-time CFOs, bankers, tax accountants, business coaches, etc. Cathy Iconis, CPA http://www.IconisGroup.com
I, too, am a firm believer in not offering discounts, even going as far as not offering discounts for non-profits. There was a very interesting discussion about non-profit discounts on the 37Signals blog: http://37signals.com/svn/posts/2580-why-non-profit-pricing As someone who is looking at ways to bundle our products and services, what ideas have others tried that worked well?