Optimal productivity makes the most of every dollar of working capital. According to SunTrust Business Owner Research, 82 percent of business owners believe that improving productivity is the greatest business opportunity they have in an economic downturn. Many businesses tie up too much cash in the form of excess inventory, idle people and under-utilized equipment. In uncertain economic times, many businesses cannot absorb the drain on cash flow of low productivity.
Here are six suggestions for improving productivity and protecting cash flow:
Fixed overhead costs tie up a lot of cash, so consider sharing resources before you take on reoccurring expenses like offices, equipment or additional employees. If you look around your industry or the local community, you will likely find peer businesses with idle or extra people, office space, warehouse space or spare systems capacity. Many seasonal businesses also have people, equipment and real estate that may not be fully utilized in the offseason.
When long-term investments in equipment, plants and inventory do not match short-term income, it can lead to a cash crunch. Try matching expenses with current income as much as possible by reducing inventory, fixed costs and leasing. Turn fixed costs into variable costs where possible. Other options for matching expenses to income include:
Finding solid value often means consolidating your purchases, so small businesses should look for suppliers that offer volume discounts, more frequent and flexible delivery, lower levels of on-site inventory and vendor financing.
Consolidated buying power also comes with increased leverage with your vendors, which can help you save money and streamline your cash flow. Credit cards and electronic purchasing are a good place to start when optimizing vendor discounts for paying early. Buying with business credit cards and corporate cards also helps you control the cost of goods sold and expenses by downloading transaction detail to accounting software for faster, real-time cost allocation to employee or project budgets.
Try not to pay retail prices unless you have to. It is likely the people sitting around you on your last commercial flight paid a different price for their ticket than you did. The same principle applies to many business expenses. For example, when copper prices increased, one business owner partnered with another to negotiate a volume discount from the copper distributor.
When it comes to improving your cash flow, faster is definitely better. Quicker turnarounds create cost savings, giving you cash that can be reinvested in another cash-generating project. Delivering faster also creates new opportunities to increase your revenues by charging a premium for expedited goods or services. Identify unnecessary steps in your operations. Henry Ford reduced the amount of time it took to assemble a car from 700 minutes to less than 90 minutes. Consider how his principles apply to your business by identifying and solving production bottlenecks. They slow down production and delay deliveries, as well as creating piles of work-in-process inventory that tie up cash.
A short-term focus on seasonal or lumpy cash flow often stops owners from making smart, high-return investments that might take a little time to generate cash income. For example, many business owners lack the fortitude to stick with a new salesperson or a marketing campaign for the six months it will take to pay for itself in new cash flow. If you are confident in your profits, but your concerns about monthly liquidity hold you back from making intelligent investments to improve productivity and generate cash, consider attaching a line of credit to your account to smooth the lumps in cash flow.
Put free cash to work in savings and investments. Many business owners keep a cash cushion around as working capital to fund the ups and downs of business. By investing this extra money, you can generate thousands of dollars in extra capital without a lot of work. Move your money to a higher interest savings account or invest for short periods using the automated services offered with your business banking accounts. By setting up a more advanced bank account, you can automatically move extra money into high yield savings or investment accounts when you have extra cash with little effort, hassle or risk to your cash flow. More and more bank accounts have rules to make sure you have the cash to write checks when you need it, alerts that let you know when you have too much or too little cash, and tools to move the money easily using the Internet.
About SunTrust Business Owner Research: SunTrust surveys small business owners and advisors as part of its ongoing business seminars and symposiums. The small business owners attending these events include both SunTrust client and non-client business owners and are representative of the broad spectrum of businesses located in the SunTrust markets. The research cited in this report is extracted from these 5,425 small business owner surveys collected between 2007 and 2011.
This article is general in nature and does not constitute legal, tax, or investment advice. SunTrust makes no warranties as to accuracy or completeness of this information, does not endorse any non-SunTrust companies, products, or services described here, and takes no liability for your use of this information.