Many businesses in the automotive industry struggle with maintaining a healthy cash flow despite being immensely profitable. This is actually one of the biggest challenges of running an automotive business. You have plenty of opportunities to be successful in this industry, but you also need to be extra careful with the business decisions you make.
In reality, maintaining a healthy cash flow for your automotive company is easier than you think. There are a few key tips to keep in mind if you want to start improving the state of your business cash flow, and we are going to review them in this article.
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Know Your Customers
The first thing you want to do when you are trying to improve your automotive business’ cash flow is get to know the customers you are serving. If you are catering to business customers, for instance, you need to start paying attention to how your invoices get processed and paid. The same can be said for when you are serving retail customers or individuals.
The more you know your customers, the better you’ll be at predicting income streams. For example, you know that the majority of your customers pay cash when servicing their cars, so you are working with immediate income on a daily basis. Business customers, on the other hand, may take up to 60 days to clear your payments.
Timing Is Everything
There is one particular reason why mapping your customers and getting to know them better is important: timing is everything in cash flow management. Regardless of the business you run, maintaining a healthy cash flow is as much about balancing your income and expenses as it is about timing when you receive and spend money.
The way to control your income is by being meticulous when doing your invoices. Don’t wait until you have several invoices to do at once. As soon as you can issue an invoice, go make one and have it delivered to the customer.
Timing expenses is a lot easier, especially now that there are many vendors who will work with you in maintaining a healthy cash flow. You can reschedule routine payments on certain dates – based on your understanding of your income streams – and schedule purchases more carefully to avoid bills maturing when you don’t have enough money to pay them.
With both factors we talked about earlier figured out, it is time to move to the next secret tip: learn to collect like a pro. Cash sales are the easiest to deal with, since you receive payment as soon as you issue an invoice. This is why retail automotive businesses tend to have a healthier, more manageable cash flow.
Invoices, on the other hand, can be challenging. With the insights gathered earlier, you can start offering discounts for early payments to encourage customers to pay sooner. You also want to establish clear credit policies and enforce them the right way. Yes, you need to maintain flexibility, but that doesn’t mean sacrificing your cash flow just to be flexible.
Discounts offered to clients who pay early are very effective. You can add them to the term of your invoice (i.e. 2/10, n/30 to offer a 2% discount on payments made within 10 days, with the payment term set at 30 days) and clients will pick them up right away.
Learn to Deal with Gaps
Maintaining a healthy cash flow is also about knowing how to deal with gaps. Even with a clear monthly budget and a well-planned income stream, you may still end up with expenses that you cannot pay due to a lack of cash. You have income coming in, but the invoices won’t be cleared until the end of the month. Knowing what to do in this situation will make or break your business.
You now have more financing options to use in this situation. Similar to how individuals can take out a payday loan to make ends meet before their next paycheck, businesses can use short-term loans to fill gaps in their cash flow. More importantly, companies like Bonsai Finance are making their loans available to more business users.
Another way to deal with gaps in your cash flow is by negotiating with vendors directly. Explain why you need to delay payment on invoices billed to you, and many vendors will work with you in coming up with a more suitable due date. You can use the opportunity to make changes to your bills and construct a healthier flow of cash.
As an extra layer of security, it is also highly recommended to start saving for emergencies; yes, business emergencies. Emergency funds are not only useful for individuals, but also very handy for businesses. Rather than immediately turning to loans or dealing with additional costs like late charges, you create a buffer in the form of an emergency fund.
Begin setting aside portions of your income to build this emergency fund. Cash flow is not about having a lot of cash. Still, building a cash reserve for when you have expenses to cover is one of the best things you can do. You are improving both the health of your cash flow and the health of the business itself.
Only use the emergency fund when you have gaps to fill in your business cash flow. It may be tempting to use the fund for buying new equipment or funding an expansion, but these are not why you establish an emergency fund in the first place. Besides, emergencies may still hit your business after you spend your emergency cash reserve, and that could be problematic.
One last tip I can give you about managing the cash flow of your automotive business is to manage your overheads. I know a lot of automotive businesses spend money on unnecessary overhead costs. Rather than straining the financial capacity of the business, learn to make cuts and save more along the way.
Keeping a healthy cash flow is a lot easier when you have fewer expenses to deal with and more income sources to explore. You now have the tips and tricks to help you take your automotive business cash flow to the next level.
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