The following is a guest post by Nick Rojas. Nick combines 20 years of experience working with and consulting for small to medium businesses and a passion for journalism to help readers grow.
Health is wealth – this saying is often construed to mean that being healthy is just as important, if not more important, than having money. In the business world, though, this is literally true: the financial health of a company is paramount to its survival, flourishing, and hopefully production of wealth. In the corporal sense, detox is the elimination of harmful elements from the body; in business, detox is also the elimination of harmful elements.
Elements that may become financially harmful in business are poor capital structures and costs (too much or too expensive debt), poor collections policies, cash flow imbalances, and unfavorable purchasing terms. Do note this list is not extensive.
Improve Capital Structure and Costs
Capital structure is how much debt and how much equity is in a business. Every business is different, and there are legitimate reasons to have high levels of debt. Having extreme levels of debt, though, may directly affect your corporal health (not to mention your business health). The key is to keep the cost of the debt low. If you have long-term loans and you’ve become more successful since you took on the loans, it may be possible to refinance into lower rates. One of the most overlooked places for small businesses to save money is expensive debt.
Make collections more consistent
If your business extends credit to customers often, you need to track the payments closely. With today’s technology, it is easy to tabulate average collection times per customer. If some customers have noticeably longer payment periods, determine whether you need a more stringent policy.
You can also implement methods to encourage on-time payments. If your entire customer base has a rather long accounts receivable turnover, consider implementing more stringent collections policies company-wide.
Having steady and predictable income is important to maintain cash flows in balance. If your accounts receivable collections are too difficult to predict, you won’t be able to make informed and accurate business decisions.
Correct Cash Flow Imbalances
This requires diving into the overall budget and finances of your company. If you notice cash inflows do not at least match cash outflows, you are necessarily burning cash or savings. During periods of economic difficulty or fast growth, this is an acceptable situation. But if it seems your company is chronically imbalanced, you need to correct this.
Find out if you can refinance for better capital costs. Determine if your accounts receivable are reasonable. Then look at your other expenditures. Expenditures largely fall under your control, while income is highly dependent on market conditions. So your next step is to look through expenditures and determine if anything can be changed.
Are you paying too many people? Can some jobs be automated? Payroll is a weighty line item for every business – consider reducing its weight. If you don’t want to lay anyone off via automation, you can shift work from internal, non-value-producing roles to customer-facing, value-generating roles like sales. Then you can reduce costs and simultaneously increase revenues.
Negotiate better deals
If you have a long-established and mutually-beneficial relationship with suppliers or customers, consider negotiating your terms. If you haven’t raised your prices in a decade, you can suggest a small price increase to your customers. If you have been faithfully purchasing in bulk from the same supplier, see if they would be willing to offer slightly better terms. Negotiating better terms is another way to improve revenue and reduce costs.
You don’t have to do everything at once. Start by looking at overall trends, and narrow down what you can feasibly do now and what must wait. The process will take time, but your business will turn out healthier for it in the end.