Your business might be heading towards bankruptcy if it has a negative balance on its ‘Net Change’ section of its cash flow statement. Immediate attention is required as failing to correct this negative trend will inevitably cause your business to run out of money.
A Cash Flow Statement has five sections:
1. Beginning Cash Balance
2. Cash In
3. Cash Out
4. Net Change: (Cash In – Cash Out)
5. Ending Cash Balance: (Net Change + Beginning Cash Balance)
In order to correct a negative balance in the ‘Net Change’ section, you only have two options: Increase the amount of cash coming in to your business (revenue), or reduce the cash going out of your business (expenses) as shown below:
To Increase Revenue:
1. Offer discounts: Establish incentives to encourage your clients to pay you in cash. For example, offering a 2% discount on cash purchases might help you receive much-needed cash. In addition, offer discounts to clients who pay their debts within 10 to 30 days; this will reduce the amount people owe you (receivables).
2. Avoid some clients: Avoid clients who are slow payers or who do not pay their debts and focus only on those who pay you on time. This is the fastest way to increase cash collection.
3. Implement a Same-Day Rule: Send invoices to your clients as soon as you render your services. At the same time, cash all the checks that you receive at the end of the same business day.
4. Be careful offering credit: If possible, ask for references or request a credit check.
To Decrease Expenses and How to Reduce Spending:
1. Analyze ALL expenses: By analyzing all your expenses closely, you might identify unnecessary ones.
2. Barter: If you have friends working in other industries, you might use barter instead of cash. For example, if you are in the landscaping business and a friend works at a printing press, you might offer free landscaping services in exchange for printing services.
3. Reduce your Inventory: Inventory is not cash! As long as inventory is not sold, it prevents you from having cash at hand. It is important to have the least amount of inventory possible.
Tip: Cut expenses as much as possible! Have a hard look at the expenses column on your cash flow. Many times, small items that are not essential look insignificant. However, saving just a few dollars per month will really add up.