5 Ways to Improve Cash Flow
When you run a CNC machine shop there’s always a lot on your plate. You deal with employee issues, job deadlines, working with suppliers and, of course, keeping the pipeline filled with work.
On the business side you probably keep a close eye on your income statement and balance sheet. However one area that’s particularly easy to overlook is cash flow – that is until it’s running low.
Having enough cash on hand to meet everyday demands is essential to your overall profitability. Without sufficient cash flow you may need to dip into your line of credit and pay interest on the money you use. Or you might not be able to pay your suppliers on time, which could cause delays in production or late fees.
So what can you do to maintain adequate cash flow?
- Manage inventory. How much money is tied up in materials or consumables you overbought? Of course you need to maintain sufficient materials on hand, but although the discount for buying larger quantities is tempting, be certain you can afford to invest your capital this way. Your customers demand just-in-time delivery, so why can ask the same of your suppliers?
- Maintain an emergency fund. One of the benefits of good inventory management is that you will have more cash available to put in your rainy day fund. This should be a separate account you only access when necessary. When operating capital is tight, you can use this emergency fund as a short-term fix. Just be sure to replenish the account when possible.
- Question all expenses. Ask yourself if a purchase is really necessary before opening the company checkbook. Just because you have a good month doesn’t mean it’s time to upgrade your ride or buy a piece of equipment you don’t truly need and that won’t improve your productivity. Spend wisely and put at least some excess money into your emergency fund.
- Invoice in a timely manner. Surprisingly, some business owners develop poor invoicing habits because they’re so focused on getting jobs done and putting out fires. However, the most common reason for poor cash flow is not invoicing as quickly as possible once a job is complete That’s why it’s so important to have an efficient invoicing system in place. Otherwise invoices go out when you find the time to issue them, which means you might add weeks to receipt of payments.
- Establish payment terms. You can’t keep cash flowing if you allow your customers to pay whenever they feel like it. Write up an invoice payment policy, discuss it with new customers up front, and print it on every invoice. The policy should clearly state your payment terms, any discounts you offer for prompt payment and late fees you will levy if payments aren’t made on time. You may need to negotiate these terms with some customers and, if so, make them part of your contract with them.
When it’s time to add or improve your manufacturing equipment, Gosiger and its financial partner, Connext, will work with you with on purchase or leasing terms that fit your budget and help you maintain good cash flow.