Understanding cash flow is crucial for the health of any business, especially when you're offering pricing discounts to attract customers.
Cash flow refers to the actual movement of money in and out of your bank account. It's how you measure whether your business has the funds to cover expenses, make investments, or weather a financial storm.
In this blog, we’ll explore how offering discounts impacts your cash flow and why tracking these effects at least weekly is key to growing your creative business.
The Impact of Pricing Discounts on Cash Flow
Pricing discounts can be an effective strategy to boost sales, clear inventory, or attract new clients. But while they might drive revenue, they also have a direct impact on your cash flow. Here’s how:
Reduced Revenue Per Sale
A discount reduces the amount of money coming into your business per sale, which means your overall income could shrink if you’re not making up for it with volume.
Cash Flow Delay
Discounts can lead to delays in cash flow, especially if they encourage customers to buy on credit or deferred payment terms.
Increased Sales Volume
While discounts might reduce revenue per sale, they can increase your overall sales volume, improving cash flow if you're able to sell more units than before.
Reduced Perception of Value
I had a very honest Airbnb guest who told me that when looking at booking an apartment in Jamaica, passed mine by initially because she thought it was too cheap and couldn't have been very nice. Fortunately, she read the reviews and decided to give us a try and she was suitably impressed, but said that we listed it too cheaply.
Continuous discounting can train customers to wait for a sale and you will find it difficult to sell at full price and can attract less than ideal customers, like Voucher Victor. Try just giving a discount at expected times, like the January sales.
When Discounting Can Work. If you have products that customers have to purchase frequently like a monthly membership offer, you may offer a discounted trial as you know subsequent payments will be at full price.
What You Can Do Instead of Giving a Discount
It may be better to incentivise purchases by adding value, like a free gift, free shipping or a loyalty program.
Why You Should Track Cash Flow When Offering Discounts
When implementing discounts, it's vital to track the effects on your cash flow daily. Regularly monitoring your finances will help ensure that your discount strategy isn’t draining your resources.
Stay on Top of Profit Margins: Discounts shrink your profit margins. By tracking cash flow daily, you can spot whether your discounted sales are still covering fixed and variable costs.
Avoid Cash Shortages: Cash flow tracking helps prevent cash shortages, especially when discounts encourage bulk buying or delayed payments.
Forecast with Confidence: When you monitor cash flow regularly, you can more accurately forecast your business's future financial needs and decide whether discounts are sustainable.
How to Track Your Cash Flow
Tracking your cash flow is easier than you think, and doing it at daily or least weekly helps you make better financial decisions. Here’s how you can get started:
Use a Cash Flow Tracker: Whether it’s a simple spreadsheet or software like Xero or QuickBooks, have a dedicated tool where you record your daily cash flow movements—both incoming and outgoing.
Check Your Bank Balance: Review your bank statements daily to see how much cash you have on hand. This helps you manage any fluctuations caused by pricing discounts.
Track Receivables and Payables: Record any expected payments coming in and bills you need to pay soon, so you’re always aware of your financial position.
Conclusion
Monitor to Ensure Your Discount Strategy Works
Pricing discounts can help your business grow, but they also bring cash flow risks.
Tracking your cash flow at least weekly ensures that your discount strategy is not only driving sales but also sustaining profitability and stability for your business.
Taking small actions every day, like thinking of how to improve your cash flow, can give you insights into how effective your pricing decisions are. In the long run, this helps you keep your business on track for growth.
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