Cash flow is simple – money comes in, and money goes out.  A positive cash flow (which simply means that you have more cash coming into your business than going out) is critical for the longevity of your business.  

“Poor cash flow management” is cited as the reason for 82% of small business failures.   What a lot of businesses forget is that the money that comes in is not all yours though – and instead of setting aside the amounts that don’t belong to you, it all gets spent and then come BAS time, businesses battle to meet the liabilities they need to pay.  

So, what can you wiggle in your business to improve your cash flow. After all, cash is like oxygen in your business.

When last did you do a health check on your business? Is your business;

  • Supporting personal withdrawals and spending?
  • Improving its financial position over time?
  • Meeting regular financial commitments?
  • Funding your business?
  • Setting aside funds to meet financial commitments?
  • Trading profitably?

If not, or you are borrowing from Peter to pay Paul, or you are not paying Peter this month so Paul can get paid and it is a constant juggle, what can you change in your business?  What can you do differently in your business and what impact will it have?

When considering “cash levers” – remember the two sides of the cash flow equation. Cash comes in and cash flows out.

So what is “Cash in”?

This relates to the sales that you make or the services that you provide. What you price your product or service at is how much how much you get in. The terms that you offer means how fast you get the cash in.    We can increase our cash in by doing things differently – you can change the price that you sell at or you can change the quantity of what you sell.  How fast we get our cash in, depends on how quickly our customers pay us.

Some levers to increase CASH IN include;

Pricing

  • Increase your prices if the market can withstand a price increase. You don’t, however, want to raise prices arbitrarily. Look at how much you’re spending on supplies and inventory and compare that to what you’re charging. Has it been awhile since you increased prices? How do your prices measure up against what your competitors are charging? Raising prices can help to bring you out of a cash flow slump, however, you have to do it strategically.  Otherwise, you could end up driving off customers.
  • Alternatively increase your prices by increasing the value that you deliver
  • Focus on the most profitable products, services and customers
  • Try and upsell the sale (bundle or offer a “other people bought this, with that” suggestion or free shipping over a certain sales value)

Volume

  • Increase the number of customers you sell to or provide service to
  • Increase the products or services offered
  • Widen the territory that you provide to service or supply to
  • Improve your sales process and convert sales sooner – for example, convert a sale on the 3rd touch instead of the 5th or 7th touch

Debtors

  • Where possible, try sell to customers with COD (cash on delivery) terms
  • Otherwise offer payment terms between 7 to 14 days as payment terms. Perform credit checks on customers before extending terms, and request 30 day supplier payment dates
  • Offer an early settlement discount
  • Where necessary – look at debtors factoring (you sell your debtors book to a collection agency for a % in the dollar, for an amount upfront, and the collection agency will collect the debtors in order for them to recoup their money)

On the flip side, cash goes out. That is how you buy stock, pay staff and have premises from which to operate. So, how can you stop the bleeding, or at least stem it so that the business does not bleed out before the fresh supply of cash comes in?

Some ideas to consider to improve cash out

Budget! Budget! Budget!

Are all your expenses absolutely necessary? They often say you spend what you have – so ensure that you consider if a purchase is necessary, or if you can at least delay the purchase.

Assets

  • Consider re-financing assets for improved terms and / or reduced interest rates
  • Sell assets and lease them back
  • Sell underutilised assets that are costing you money to operate

Expenses

  • Reduce your discretionary spending
  • Reduce your overheads – negotiate better terms on your rent or insurances and purchase prices for your inventory

Inventory

  • Reduce the cost of stock or materials
  • Improve terms with suppliers
  • Clear obsolete or slow moving stock
  • Review your ordering process so that you don’t have long stock holding periods

Staff

  • Improve staff utilisation
  • Reduce staff turnover (saves time in training and upskilling and on-boarding, and saves money in recruitment costs, advertising and interviewing time)
  • Consider contractors to meet ad-hoc demand
  • Consider a revised staff mix

Businesses should remember that cash flow is a different concept to PROFIT. Profit remains after expenses are deducted. A business can be profitable but lack sufficient cash flow, which can ultimately lead to their demise.  

Businesses should also plan ahead for seasonal changes in business. Think of a basic example – like an ice cream vendor. Business in winter is likely to be far less active than in Summer. Successful businesses will plan ahead and manage this, by performing a regular cash flow analysis.  Running this analysis on a weekly (or monthly) basis will make it easier to pin point the ebbs and flows in your cash flow, and you can address the issues before they happen.

A cash flow forecast keeps track of all of the money coming and going from your account and exactly when you expect the money to flow in or out. Predicting when the cash will flow in and out of your account will help you keep track of all of the bills you need to pay and funds you are expecting to receive so that nothing is missed. It will also serve as an early warning system so you can identify a potential short fall ahead of time. When you have time and see potential issues far enough in advance, you will likely have more options for addressing the shortfall, for making a plan so to say to get through it.

A cash flow forecast is essential.

In fact it could be your lifeline.

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