What can you do to get more cash?

Business owners know that when the business makes a profit, it does not always have lots of cash. There might even be a deficit—while making a profit for the month, the business can still be short of cash. This is annoying, and, to some owners, somewhat mysterious.

Oftentimes, however, there is a solution to this problem, and it is within the control of the business and is relatively easy to accomplish.

But first, let’s look at the general ways that an owner can get cash in the business; there are four of them. And they’re all under the owner’s control, although some are easier to accomplish than others.

First, the owner can put more of her personal funds into the business. But when we talk with owners about this option, they balk. They tell us, “You don’t get it. The idea is for me to take money out of my business, not put it in.” Good point.

Second, the owner can obtain a loan. Indeed, this is a useful option in many cases, and banks have made a good living for centuries by providing the money. Unfortunately for the business owner, the money must be paid back, together with the interest attached to the loan.

Third, the company can make more profit. In many cases, though not all, making more profit can generate more cash for the business. But usually, the amount of additional profit that a company can make, by working just a little harder, is not sufficient to make a real difference.

And in many cases, the business can actually have less cash when it generates more profit. For example, this commonly occurs when a company must buy products in advance of sales (must carry inventory) or when it must wait for its customers to pay for the services or goods that it purchases (when customers are “on credit”).

Why is that so? Remember, the company is required to buy the inventory it hopes to sell at some future date, and it also must pay its workers every day. These expenses are a cash drain for the company until the money from a sale is actually collected from the customer. So, the company spends money for inventory and internal expenses, but it doesn’t get that money back until the customer sends payment, which can be months after the company paid for the goods and labor. Thus, for the company, the higher the sales, the lower the cash flow.

This leads us to the fourth way to make more cash, and that is to operate the company more efficiently. This is the one place that the owner can see relatively significant effects upon cash flow, with relatively little cost or effort.

We’ll talk here about two ways for doing this: decreasing inventory and decreasing accounts receivable. And we’ll show you how you can determine what these mean to you, in real dollars.

Not every business has inventory or accounts receivable. Service businesses, such as accounting firms or consulting engineers, sell their time rather than a tangible product and don’t carry inventory. Other businesses, such as retailers, collect money at the time of the sale. If that is your case, you needn’t worry about the effects of inventory or accounts receivable on your cash flow. Good for you! That’s just one less thing to create worry, and you’ve got enough of those.