Cash flow is a daily worry for many businesses. It can be hard to keep up with your working capital when you have to pay your employees, cover any costs, and order new supplies.
Cash flow is a key part of making money. Some people think it’s easy to have a steady flow of cash if your business is also in demand all the time. On the other hand, cash flow is a more complicated issue, and 90% of small businesses fail because of it.
When you dropship, you switch from a traditional supply-side management strategy that involves a lot of middlemen between your company and the manufacturer to a strategy that focuses on making sure you don’t overstock or understock.
What Does Cash Flow Mean?
Cash flow is a way to track how much money comes into and leaves your business over a certain time period. When your business has a positive cash flow, it brings in more money than it spends. This means you can pay your bills and take care of other costs.
If your cash flow is negative, you won’t be able to pay those bills. Working capital is the idea that you have the money you need to pay your bills.
Cash is king when it comes to managing the money of a growing business. Cash flow management is the answer to the problem of having to wait a long time between paying your suppliers and employees and getting paid by your customers.
At its most basic, cash flow management means putting off spending money as long as possible and getting people who owe you money to pay it as soon as possible.
Forecasts of cash flow are not a way to see into the future. Your estimates take into account things like how often your customers pay, how well you keep track of upcoming expenses, and how patient your vendors are.
Make sure you don’t just assume that receivables will keep coming in at the same level as before, that payables can be extended to the same level as before, that capital improvements, loan interest, and principal payments have been calculated, and that seasonal changes in sales have been taken into account.
To start your cash flow projection, add up the money you had on hand at the start of the period and the money you will get from other sources. You will need to get information from your sales reps, customer service reps, people who work on collections, credit managers, and your finance department.
When you ask, “How much cash is coming in from customer payments, interest earnings, collection of partial bad debts, and other sources, and when?” you are asking the same thing.
How Cash Flow and Sales Work Together
Cash flow shows how much money comes into a business and how much money leaves it. The amount of money that comes into your business is called its revenue.
When figuring out cash flow, financial activities are also taken into account. For example, did the bank just put $10,000 into your account? Yes, it does matter!
Why Cash Flow Is Important:
“Revenue is vanity, profit is sanity, and cash is reality.” This is a well-known business saying.
Cash is the most important part of managing money. When you don’t have enough cash on hand, things start to go wrong.
Managing your cash flow means figuring out when you will have cash on hand, how to get more cash faster, and how to control your spending so that you don’t run into cash flow problems.
Managing your company’s cash flow is a key part of managing its finances.Once you know how to do that, you can start to think about how to grow your business and make more money.
How to Handle Cash Flow When Dropshipping
Check how much money you’re making.
First, you should make sure that your business is making a fair amount of money. When your basics are off, it doesn’t matter how well you manage your cash flow.
Make sure that every service and product works well. The key is to price your products correctly and get rid of inefficiencies. Don’t just try to make sales, try to make money.
Managing Your Payables
Growth on the surface can sometimes hide a lot of problems. As the boss of a growing business, you need to keep an eye on how much money is being spent. Don’t get too comfortable just because sales are going up.
If your costs are going up faster than your sales, you should carefully look at your costs and look for ways to cut them or keep them under control. There are a few things to think about when using cash wisely:
- Use the terms of payment set by the creditor. You shouldn’t pay a payment due in 15 days if it’s due in 30 days.
- Use electronic funds transfer to pay your bills on the last day of the month. Your money will be available for as long as possible while still paying suppliers on time.
- Make sure your suppliers know how much money you have. If you need to wait to pay, you will need trust and understanding.
- Think carefully about the discounts that vendors offer if you pay them early. You might have to borrow money from your suppliers at high interest rates, but you might also be able to lower your overall costs. It’s all in the little things.
- Pick suppliers based on more than just price. You might be able to improve your cash flow more if your payment terms were more flexible.
Choose the Right Payroll Period
Use a payroll system that fits the way you make money and is in line with wage and hour laws. With their daily income, restaurants and stores can pay their employees more easily.
Manufacturers and wholesalers often need cash, but this can be hard to do when money isn’t coming in as often.
If you get paid less often than once a week, like every two weeks or once a month, it may be helpful to hold on to cash until you get paid, as long as wage and hour laws let you. Check with the Department of Labor to see if your state has any rules about how often you have to pay your employees.
Talk to your vendors about how to pay them.
Using suppliers with low prices may be the best way to improve cash flow, but being able to pay in different ways may be more important. Make sure to ask your suppliers how they want to be paid. Your payments may be set up to match when you get money.
Keep a strict policy on credit
If you give customers credit, you need to stick to your credit policies to make sure you get the money you need. Do these things:
- Follow up on late payments right away, send out invoices on time, and make sure you’ve been paid.
- Do a credit check on new customers before you give them credit.
- Set up a cash-on-delivery policy for repeat offenders and keep an eye on your accounts for customers who pay late.
Get an account for your business.
Using a business credit card for daily expenses can free up cash. It’s easy to keep track of these costs when you bank online. Use a rewards program that gives you a certain amount of cash back on purchases to save money.
Plan Expenses
Instead of buying equipment and supplies when you need them, think about when you should buy them. If you have a plan, you can keep track of how much you spend. When you try to list expenses from the past, you do so after the fact. When you plan purchases, a tracking plan is automatically made.
Set an automatic payment schedule for utilities, rent, and insurance. You know when and how much you will spend on those dates.
Quickly get your money.
To improve cash flow, try to get people to pay you quickly when they owe you money. Here are some techniques you can use to collect receivables faster:
- When customers place an order, they should have to pay a deposit.
- Reduce the price of old stock on purpose to get rid of it.
- Customers who pay quickly should get discounts.
- Make it possible to pay invoices and bills online.
Liquidate Assets If Possible
If you have an inventory, you might want to look through it to see what assets you no longer need. This is true even more when the economy is bad.
Look closely at products that might not sell on their own. You might buy them as a novelty or to go with something else. Customers will be more careful about what they buy because of the economy, so it will be harder than usual to sell these things.
Keep prices low, but watch out
When the economy is bad and your business is hurting, it makes sense to want to cut every “optional” cost you have. When the economy is bad, cutting costs is a good idea, but it should be done carefully.
If you don’t have much going on, you might want to put on hold a graphic design subscription you use to make a few extra images for social media. It might also be a good idea to stop running expensive PPC campaigns that use up valuable resources but don’t bring in sales.
If there are problems with your supply chains, you might have less stock than usual and not be able to meet the needs of a lot of new customers. The last thing you should do is spend money on clicks that don’t lead to sales.
By cutting how much you spend on ads, you can switch from expensive campaigns to ones that cost less. For example, organic social media marketing is cheap, while email marketing is cheaper but still has a high success rate. This can help your business make money without going over its budget.
Think about your upcoming costs.
Cash flow problems for businesses tend to get worse when times are hard because of costs that were not expected or were forgotten.
Some costs are easy to remember. Some of your monthly costs may include billing and credit card fees, payments to suppliers, and payments to employees or contractors.
Because of dropshipping, your cash flow will be different.
There are many things to think about when using a dropshipping strategy, such as your cash flow and the kind of business you run.
Walmart, Costco, and Kroger, for example, may not be able to take full advantage of dropshipping supply strategies, even though their websites do allow for this order format. This is because most of their business happens in their physical stores.
So, it might be hard for companies that make products that customers need right away to switch to a dropshipping strategy. They should try to use dropshipping to add to the money they already make, not to replace it.
If you start dropshipping, most of your orders will come from online places.
Instead of having it sent to a supply center, wouldn’t it be better to go to a store that sells the product or a similar one?
When dropshipping is part of an e-commerce strategy, it gives the best results. Because of this, any business that wants to use dropshipping must first build an online presence and figure out how to get free traffic.
To make sure your dropshipping business makes enough money to justify your company’s presence in a market, you need to increase organic traffic and get your site visitors and product fans more involved.
Bottom Line
To stay in business during a recession like the Coronavirus, you need to find ways to improve your cash flow.
The process can be especially hard when customers are less likely to buy, when demand for a certain item changes a lot, and when your sales predictions get thrown off. Inventories and finances are harder to plan for than they used to be.
These tips can not only help you get more working capital, but they can also keep your business running smoothly until the new normal is set.