Cash flow optimization is not just a holiday thing. Since cash flow problems are the number one cause of small business failure, your business needs to have smooth cash flow every single day.
However, the busy holiday season usually throws additional burdens on small business owners. Ahead of Santa Claus, inventory, supply chain, logistical and cash flow issues often slide down the chimney.
Luckily, if you want to know how to improve cash flow, there are several tricks you can use.
How to Increase, Improve, and Optimize Your Holiday Season Cash Flow
How to Calculate Your Cash Flow
Simply put, your cash flow is what remains from your accounts receivable after you’ve paid your accounts payable. There’s a basic formula for simple cash-flow predictions:
Incoming cash – (Outgoing cash + Inventory) = Cash flow
However, simple is almost never the case in life, and certainly not in business.
Forecasting your holiday budget is the first step to cash flow optimization. Even if it’s just an estimate, a good forecast can prepare you for the holiday snowstorm and allow you to plan ahead.
Remember, forecasting is necessary for the whole business year. But even if you can get by without a forecast on slow days, just “going with the flow” may very well kill your business during the holiday rush.
When making your forecast, calculate each bill’s due date. If you can, try to plan for some back up cash, in case a business partner is late on their payment
The biggest problem with cash flow is that your bills may be due before you’ve received your outstanding invoices. Or, some of your business partners may pay you late, which can cause a temporary cash shortage at your business.
Make sure you take all that into account. When making your forecast, calculate each bill’s due date. If you can, try to plan for some back up cash, in case a business partner is late on their payment.
How to Increase Your Cash Flow
Once you’re done with your forecast, you may find yourself with a result you don’t like. If your cash is barely enough for your business to scrape by on any given day, you’re most likely not equipped to handle the unpredictability and high volume of the holiday season.
There may even be times when your cash only exists in the form of inventory and accounts receivable. Which, to your accounts payable, is no cash at all. In those cases, you need to know how to increase your cash flow to save your business from insolvency.
Renegotiate Your Accounts Payable
Don’t pay your own bills until they are due. Sending off a payment early may create a few feel-good moments for both you and your business partner. But later on, the missing cash could cause you a few sleepless nights if an unexpected invoice comes in.
In addition, you can approach a few trusted business partners and find out if they’d be open to extending your deadline for payment. Although money is often short around the holiday season, some business owners with faster cash flow may be in generous spirits and grant you a few extra days.
Offer Prepayment Sales
A great trick on how to increase your cash flow is selling products and services that you’ll deliver later. The year’s end provides perfect opportunities for these types of sales as holiday gifts or ways to save money for the coming year.
A simple gift card for any products or services in your shop would do. The main thing is the concept: pay now, deliver later.
If the nature of your business allows it, offer your customers an early bird discount if they pay you early for future purchases. For example, 5% off for leasing a moving van next spring. Or 10% off from the price of your house-renovating services.
Even a simple gift card for any products or services in your shop would do. The main thing is the concept: pay now, deliver later.
It’s imperative you use the fastest and easiest payment methods. The reason is obvious: if your money is in transit, you can’t use it for anything.
This is especially true if we’re talking about international payments with transfer times of up to 7 business days.
In addition, make sure you use a payment provider that offers competitive foreign exchange rates, since you can lose a lot of cash on bad conversion rates.
One of the best ways to improve cash flow to have a consistent payment policy.
Don’t tolerate regularly late payments from your business partners. Instead, let them know from the start of your relationship that you stand by your payment deadlines and you want them respected.
We’re not saying you shouldn’t be understanding and generous when a business partner gets into difficulties. A late payment once in a while is not the end of the world. But regular late payments hurt your business, and you definitely can’t allow them if you’re looking for ways to improve cash flow.
For many businesses, the holidays require extra staff. If that’s the case with you, make sure you have the extra funds ready to pay them with.
It’s really important that you hire people only for the tasks you need doing, for the time you need them done in. It may sound obvious, but realizing this goal can take a lot of planning and forecasting.
You don’t want your extra staff playing on their phones all day with nothing to do, but you also want to avoid your regular staff dying of exhaustion with piles of products still waiting to be handled.
It’s really important that you hire people only for the tasks you need doing, for the time you need them done in
Base your assumptions on your sales forecast, as well as your staffing needs from last year. Past experience is always a good basis to build your current predictions on. Make sure you hire extra staff with flexible conditions (i.e. working hours, time-frame of contract) to allow for last minute changes and adjustments.
Knowing how to improve cash flow requires knowing how to improve your operations as a whole. It’s a difficult task, but it’s inevitable if you want to lead a successful small business.