Basic Business Tips I Learned. #1 Cashflow is King
Basic Business Tips
When I started a small hobby business, it was initially just to earn a few extra dollars to help pay the mortgage.
I was already employed full time, but my income was not enough to pay for my household expenditure.
My workplace was fun, informal, & allowed me to do any type of work I wanted.
There are not many workplaces where you can wear whatever you like, can work in Sales, Warehousing, Office, Accounting & help with Onsite projects.
Getting a part time job was an option. But I did not want to work on my weekends.
A business opportunity came up to supply business equipment & supplies. It was a diverse business that provided the challenge I was looking for.
Later on, due to another opportunity, and a need for better cashflow, I expanded into a new market. This solved some of the issues that I will mention below.
Basic tips I will cover are;
- Cashflow Is King
- Customers are fickle
- Barriers to Industry count
- Always keep chipping away
- Never discount
- Price is only part of the equation
- Build relationships
These are not in any particular order of priority. They can each be important at different times.
1. Cashflow is King
Most people who have some basic business nous would have heard about cashflow & "cash is king".
If you have undertaken business studies, particularly, accounting, then you would have had to undertake a cashflow statement.
Profit and loss, is one thing, but cashflow is another.
If you look at company annual reports, they all have to have a cashflow statement. A summary of all of the ins and outs of monies into, and out of, the business.
Avoid, or minimise, payment terms for customers
In my office supplies business, 99% of my customers wanted an account. It was just the nature of that business. I had most customers on 30 days, but two major accounts were, 45 days & 60 days.
That is a long time to wait for your money, especially, when most of my suppliers were 30 day accounts.
Everything was fine until the 2008 Global Financial Crisis hit.
At that time, all my customers were feeling the effects. One 45 day customer suddenly blew out to 150 days!! I couldn't stop their account, and, they still wanted to be supplied!
It was a very stressful time.
When I rang for payment, their accounts department said, "We have rent & employees to pay first. You will have to wait!"
At that stage, my business was almost finished. They owed me more than what my business was worth. My suppliers were paid upon my credit card & it was just fortunate that my other business started, that I could weather the economic troubles.
My other business was within the scrap metal industry. It was a stroke of luck, which I'll cover in another topic. However, that industry was based on, money up front. Customer's paid me before they received the items.
That business was thriving at the time & I had steady sales every month that covered the costs of my office supplies business.
So, where possible, get payment before you supply.
When somebody owes you money. You are really at their disposal and have limited power.
Receive good payment terms from suppliers
When I first started out, I had to pay upfront for my supplies. The fact that my customers had payment terms, meant that I was without cash for way too long. For a small business, that is not sustainable.
On my second year, I had significant growth. The owner of one of my suppliers provided me a gift/reward. He was a really nice person and thanked me for being a good customer (paying my bills on time). He asked me, "Is there anything I can do to help your business?" I explained to him, that I needed payment terms, but, his accounts department refused me because I had no business history.
He immediately got onto the phone and organised payment terms right there and then.
That made my cashflow so much easier. I then always made a point to ask my suppliers for improved payment terms whenever I felt it was reasonable.
Pay your obligations when you can
It may seem a smart move to hold off on paying your suppliers or other bills. I have not seen this work effectively, unless, the business has no ability to pay its obligations. In that circumstance, they drip out payments, in order to get through a difficult period.
By paying my obligations when I had the cash available, I built a strong reputation that I could use for better pricing, better payment terms & to get help when things were tough.
It is always a smart move to keep your business as sound as possible, particularly, in the eyes of other companies and institutions that can help you later on.
Keep smart stock levels
My first two customers said that I could have their business, so long as, I had stock available for whenever they needed it.
That was fine. I always kept my inventory levels strong to ensure I could deliver to my customer on the same day.
However, one day, I had alot of stock left on the shelf, I rang the customer to make sure everything was fine. They had changed machinery & no longer needed that stock!
They didn't tell me. They didn't care. I lost $6000 because of it.
I vowed never to keep stock levels where possible. So, to remedy my situation, I found 4 more suppliers, in different parts of the country. That way, they held the stock, & I had enough range of supply, that I could support any customer.
My other business was different, because I was the only supplier in the country, I had to hold my stock. The difference there was, it was only one line of stock that I held around 8 months.
This was important, as I had to import the product, via seafreight, and the quantity needed to be enough to lower the shipping costs per unit.
In that way, I knew my stock would sell at some point.
Keep smart stock levels.
Inventory ties up money.
Only keep stock that you know will move & that you have to have.
Keep overheads under control
Another lesson learned was not to go overboard with costs when you set up your business.
Sometimes, you can be so optimistic, that you outlay more than what you really need.
You may not really need a new laptop, new desk, more expensive internet or phone plan.
You may not need a new car.
Especially, when you think that it will be a great saving on tax.
Sometimes, it might be a smart purchase, sometimes not.
Whatever you spend your money on, is money that, your business, does not have anymore.
Also, be wary of family & friends. You may have had a successful sale, or, a deal that you know is good for business. You may share that information with people that you love & care about.
These people may be flawed individuals that think you are now in a position to help them.
Be careful when you hand out money from your business. You may need that money.
Keep business and personal seperate.
As much as you want to be generous, or others may be in need. Your business should not get caught up in emotions or your own ego.
Be smart with your money.
Keep your money as a protection against tough times.
I hope some of these lessons that I learned, can help you.
Please let me know about your experiences.