Cash Flow and Profit: 5 Things to Consider

Issues with cash flow affect the majority of small businesses. Many reasons contribute, including cash tied up in inventory and delinquent payments. An area often overlooked is low profit margins. Some entrepreneurs reduce prices and take a cut in profit to stay in the game. It’s a risky thing to do; price breaks can pay off in terms of sales, but they bring down the amount of cash you have on hand. If want to improve your cash flow, consider reassessing your profit margins. Here’s how.

1. Calculate Your Profit

Do a breakeven analysis to help determine the point that you begin to make a profit. Different from the gross margin (reflecting profitability of a single service or product), this is net profit. When your revenue equals all costs or overheads of your business, you’ve broken even. While analyzing, be sure to capture every single cost that your business incurs.

2. Adjust if Low

Take a look at your margins. If you’re consistently reinvesting profits back into the business or your costs are too high, it’s easy to come up short. Can you renegotiate contracts, decrease your expenses, or operate your business in a leaner way? It’ll make a big difference. If margins are dire, hold off on making large business purchases for now.

3. Expand if High

If it’s the opposite situation and your profit margins are in a good spot, consider looking into other ways of increasing your bottom line. Be astute, though. If your cash flow is tight, your business might not be able to tolerate the costs of entering new markets or driving growth. Careful investing in new initiatives and products might be a way to go.

4. Observe Your Competition

Research your position in the marketplace. Is there a way to sufficiently differentiate your business from competitors to place it at the high end of the market — where your competition isn’t as well established? Evaluate the market in that “place” and develop a strategy that will get you seen and noticed.

5. Consider Raising Your Prices

You might be underpricing your goods and/or services. It’s a common issue for small businesses that lack the operational know-how of larger firms. As you adjust your pricing structure, make sure that your value proposition is robust and that you have a solid reputation.

Precise evaluation of margins will benefit your cash flow. Try these tips to turn a profit.


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