In Step 12 to Building a Better Business you looked at ways to speed the rate of cash coming into your business. In this step, we’ll discuss ways to slow the rate at which cash leaves your business through expenses.
Here are some options to consider:
- Pay With Checks – The same reason you don’t want to accept checks from your customers is the same reason you want to pay with them whenever possible. Checks take longer to process, which means you hang on to money in your bank account for a little bit longer than you would if you paid with a credit card, electronic transfer, or cash.
- Negotiate Payment Terms - Talk to the suppliers you buy from most often, if you’re in good standing with them, ask if they would extend you business terms. Instead of paying for things your purchase from them immediately, ask if they will allow you to pay by invoice or monthly statement. You typically have 15 to 30 days or sometimes more time to pay once you receive the invoice. If you’re already getting invoices from suppliers, see if they offer discounts for early payments. While this doesn’t necessarily slow the rate of cash going out of the business, it does reduce the total amount you have to pay. You’ll have to decide which is more important given your current business situation.
- Make Judicious Use of Credit – Use a credit card or secure a line of credit from your bank to pay expenses. You could even establish credit accounts with suppliers who offer them. Be careful though. Just like a personal credit card, you do not want to expense things on a credit card that you won’t be able to pay off by the next billing cycle. Finance charges quickly add up, and you’ll end up spending more money in the long run if you don’t pay off balances in a timely manner.
- Buy Inventory and Materials Only When You Need Them – Purchase the materials you need to produce your product or deliver your service as close as possible to the time you need to produce or deliver it. Don’t spend a lot of money building stockpiles of inventory that will sit unused for a while before any orders are placed. That money you have tied up in inventory or materials could be used for other expenses. This is a concept known as just-in-time (JIT) production, with the goal being to shorten (or completely eliminate) the time between when you pay money to produce a unit of product and when you get paid for producing it.
- Lease vs. Buy – instead of making one-time, upfront payments for big-ticket purchases, consider leasing where you’ll pay smaller amounts over a longer period of time, thereby freeing up more cash for other uses.
photo: Kaptain Kobold (Flickr)
