Cash flow improvement often feels like chasing a shadow for many business owners, but what if I told you it's not as mysterious as it seems? In fact, there are just six key areas to focus on to make a significant impact on your cash flow. Let's dive into these strategies that can transform your business's financial health.
Marginal Cash Analysis
The figures in the following chart are all about your Cash Flow (NOT YOUR PROFIT).
The above chart states, that for every $100 of new sales coming into the business, the business needs to find $14.75 in cash to fund sales (see the Net Variable Cash Flow Figure). Therefore, if we were to grow this business, we would need access to surplus cash e.g. line of credit, overdraft, cash at bank etc.
Area 1 – Revenue Improvement
The first step in improving cash flow is revenue improvement via a price increase or an average value of sale increase. NOT volume of sales. More customers in the above situation will dramatically decrease the cash in the business. Therefore we must improve the price or sell items of a higher average value of sale.
Area 2 – Cost of Goods Improvement
A reduction in the Cost of Goods will help to improve the cash flow situation. This can be undertaken via a price improvement / average value of sale improvement as per Area 1. Additionally, you can reduce the actual Cost of Goods by changing suppliers and/or getting a better deal from suppliers. Working with suppliers via tender process, telling them you are gaining additional quotes, and purchasing online.
Area 3 – Accounts Receivable Improvement
Accounts receivable, debtors e.g. money your customers owe you. By collecting faster, getting deposits, progress payments, collecting payment at time of delivery etc., are different ways to improve this figure. Your financial reports should tell you the average number of days your receivables are outstanding. The idea is to reduce the number of days in comparison to your current position.
Area 4 – Inventory Reduction
As with Area 3, it’s a matter of reducing the average number of days your inventory is sitting around. Sell off old stock, buy faster-moving stock, get stock on consignment etc. Implementing a stock system, bundling slow-moving items (at a discount) with faster-moving items. The idea is to reduce the number of days in comparison to your current position.
Area 5 – Accounts Payable Increase
Area 5 is different from the rest as we actually want to increase this number. The key is to pay your suppliers slower, while still keeping within trading terms of your suppliers. Increasing the amount owing to your suppliers keeps cash in your business longer. However, there is a trade-off… the money must be put to operational use NOT buying cars or toys etc. Therefore, the idea is to increase the number of days in comparison to your current position. You can also use a 55-day interest-free credit card, BUT you need to fully pay the card by day 50 AND the card must only be used to pay creditors.
Area 6 – Overhead Reduction
Finally, let’s talk about our last key factor in improving cash flow. Reduction of Overheads / Expenses without reduction of required capabilities. For example, you would not terminate an effective salesperson to reduce costs. However, you might reduce some admin personnel if they were not being fully utilized. You might sub-let some of your office space if it is vacant. Review your monthly costs and see where you can reduce the payment by changing suppliers and getting rid of the cost.
Putting in a purchase ordering system will require their team members to gain authorization before spending the money. Many businesses we work with have an “after the fact” system e.g. they spend and then it’s too late. If you have a purchase ordering system, where the team needs to list the item, the cost, the reason for wanting it, and a purchase order number… then you get to decide to spend or not to spend before the order is placed.
As well, you have a tracking number to check the order when the supplier delivers it. Many clients we’ve worked with are amazed at the number of times the supplier did not supply all goods, OR the goods were invoiced at a much higher price.
And there it is! Six ways to improve cash flow in your business – now you can take action!