There is so much to consider when starting a business. Who is your target market? Who are your competitors? What are your price points? Who is the right person to hire? The list is endless. An important question that must be considered though is how does cash move from and, more importantly, to your organization.
Cash flow can be thought about in three dimensions. All three are covered in more detail in our white paper, the Three Dimensions of Cash Flow. Today, we will look at one of these dimensions: sources of cash.
Money can come from three places: sales; financing; existing assets.
A lot can be learned about cash flow when a few simple questions are asked about the above sources of cash.
Sales: How are you paid? Are you paid immediately or do you have to submit an invoice? Do you offer financing? How do you customers prefer to pay?
Financing: When it is time for new equipment, materials or space how will financing impact your cash position? Will financing drive more business or reduce operating costs?
Existing assets: What do you own now? Are your existing assets helping your business?
Most businesses have several relationships that have to be managed on a day to day basis. From vendors to customers, each relationship has to be handled in its own unique way. Often, these relationships can have a major impact on your cash flow, specifically on the sources of your cash. Sources of cash can come from three primary avenues: sales; financing; and existing assets. Business relationships then factor into these three sources. Ask yourself the following questions about each of the following relationships to see if you are maximizing cash flow.
Do your vendors offer discounts? Do you take advantage of them?
Do you have a good payment track record with your vendors?
Can you leverage that track record for better terms?
How does your past payment experience impact what kind of terms or prices you can offer your clients?
Do you have any control over when you get paid?
Are you able to offer discounts to clients?
Are clients with better payment history offered better terms?
What would offering better terms to all clients mean to your business?
How much debt to you have?
Does your debt help your business operate or make it more profitable?
Do you have any leverage to gain better terms with your bank?
Relationships to Existing Assets
Are your current assets obsolete?
Can those assets be turned into cash for your organization?
How could new equipment impact your business?
It is important to always review your business relationships and investigate how they impact your cash flow. Work to make these relationships work for you and positively effect your organization. Sources of Cash is just one of the three dimensions of cash flow. To learn more about sources of cash and the other two dimensions, please download our free whitepaper today!