How to Reduce Cash Outflows
The flow of cash leaving your business can be a major concern during this economic slump. Of course, this is a sensitive matter, because you do not want to jeopardize long-standing relationships with suppliers or clients. With that in mind, here are several ideas to consider.
- Arrange to pay large bills at the latest date possible (assuming there is no discount for early payment). For instance, say you delay a $25,000 bill for six weeks. If the money is invested at an annual simple interest rate of 5%, you save $144. The savings can multiply dramatically when this strategy is used repeatedly.
- Compare the cost of taking a discount against the benefit of delaying payment. If the amount that can be earned on the cash is less than savings via the discount, you generally should not delay payment. However, do not assume that you will always come out ahead with the discount. The best approach is to have things figured out both ways.
- Avoid excess inventory. This not only ties up cash resources, but the carrying expenses—warehouse space, insurance, etc.—can effectively reduce the value of the goods. Note: The tax requirement to capitalize certain inventory expenses increases the cost even further.
- Weigh any special offers from suppliers that can reduce overall costs. For instance, you may be offered installment payments, consignment sales or special terms for the purchase of seasonal items. In addition, you may be able to arrange delaying payment until the goods are delivered.
- When it makes good economic sense—factoring in price and quality—try to buy your goods from the fastest supplier. This helps to cut down on inventory costs. If you normally deal in large quantities with just one vendor, you may be able to get preferential treatment.
- Ask the supplier to bill you at the end of the month (assuming you are a large customer). That will enable you to stretch your cash further each month—without paying any finance charges.
- Try to negotiate a price discount for high-volume purchases. Note: Don’t forget about those inventory expenses when you are figuring out how much things will actually cost you.
- Take advantage of the most favorable accounting methods. For example, depending upon the circumstances of your business, it may be advisable to switch to the LIFO (last-in, first-out) method of valuing inventory.
- Do not give Uncle Sam “free” use of your money. A company can generally avoid a corporate estimated tax penalty by paying quarterly installments equal to 25% of (a) 100% of the prior year’s tax liability or (b) 100% of the current year’s liability. Caution: There are special rules for large corporations.
- Finally, consult with your professional business advisers. They may be able to suggest various ways to streamline your operation, reduce operating costs and lower overhead.
In some cases, you may want to conduct a business audit or review. This can provide a complete picture of the company’s finances.