At its simplest, to succeed, a business must bring in more than it spends. In other words, a business must make a regular surplus of cash to survive. Maximizing sales and income is usually high on the list of priorities for business owners. Here are some top tips for maximizing income.
- First, decide on a longer-term strategy (3 to 5 years). Answer the question “What sales value do you think the business can reach in that period?”
- Carefully develop a marketing plan that will help your business achieve the strategic goal (new products, new markets, improved quality, increased volume).
- Create a plan for the next twelve months that clearly identifies actions to take (investment, training, re-tooling, market surveys, sales discounts or credit, etc) and ensure that funds are in place to finance it.
- Once the plans are complete, commit to them. One step at a time.
- Be careful when offering credit to customers. Try to build in an element of lost cash into the sales price if possible.
- Monitor how credit customers are paying. Keep following up to make sure they don’t take longer to pay than agreed.
- A high proportion of credit sales during a period of rapid growth will put a strain on cash flow. Sometimes it is better to limit sales than to risk running out of cash (See Akhra’s business failure story).
- Opportunities arise at any time. If possible, create an opportunity fund that will allow you to take advantage if a situation arises that could grow your business (failure of a competitor, new technology, new regulation, new product idea, joint venture).
- Diversify your customer base as much as possible. More customers mean that the business will not be so badly affected if one or a few customers go elsewhere.
- If your products rely on seasonal sales, growth will depend on the ability to either capture a bigger and bigger share of the seasonal market or on diversification of products or services to increase sales in other seasons.
Watching the Cash
When the cash coming in is less than the cash going out, the business will suffer a cash deficit. Some businesses can go for months and even years making cash deficits, but these must be paid for eventually either by someone else in the form of credit, loans, or capital investment, or with future profits, assuming there is enough cash to keep the business afloat in the meantime.
Some deficits are simply due to short-term issues with cash flow (i.e. money must be spent before the cash to pay for it comes in). These deficits can be paid for with short-term financing such as credit from suppliers, bank overdrafts, or short-term loans from friends and family. This type of financing is often referred to as working capital and tends to be more expensive than longer-term financing.
Deficits, or cash shortages, that are caused by major investment in machinery, automation, or staff expansion and training, are usually funded by longer-term sources. Banks (overdraft, loans), friends and family (loans), or investors (loans, or purchase of shares) are the usual sources. Very long-term financing is usually provided by investors who normally wish to own a portion of the business in the form of shares, in a partnership, or some form of joint venture arrangement.