Everyone knows that “cash is king”. But how can entrepreneurs actually improve their cash flow?
This article will provide some high-level ways to practically improve your cash flow.
Working capital management
Working capital refers to your inventory, debtors and creditors. This is often the biggest cash burner, and quickest way to improve one’s cash flow.
Inventory
Most businesses need inventory in order to sell products. People tend to treat inventory with far too much emotion, which means poor buying decisions, or changes in circumstances result in holding onto inventory for far too long. The goal is to reduce the number of days of inventory on hand.
Identify slow-moving inventory (before it gets too old). Understand why it is slow moving, and how to increase sales. Discounts, increased marketing, and possibly an increased sales push can assist with moving this stock.
Make sure you have sufficient fast-moving stock. Sell the aged and slow-moving stock and replace with fast-moving stock that you seem to always run out of!!
Debtors represents the amounts customer owe you. The goal here is to decrease the average time it takes debtors to pay you (measured by debtors’ days). A fat and lazy debtors’ book usually relates to 3 simple problems:
Poor credit management – too much credit to customers who do not pay. Perform more thorough due diligence, including following up on references. You can also stagger the customer’s credit – 1st order cash, 2nd order 7 days payment etc. until they build up a bit of a track record.
Poor collections management – not following up with outstanding customers. This basic discipline is something anyone can become good at. Your goal is to get your customer to pay you before they pay anyone else. If you have exhausted all options – hand the debt over a collection agent.
Poor internal processes and a lack of understanding of the customer’s processes. All too often I see long outstanding debtors that are reputable companies. I realise simple issues like not referencing their purchase order, or not attaching the signed proof of delivery to the invoice result in lack of payment. This is a 100% own goal. Get your sales, operations and debtors’ team on the same page regarding customer’s internal processes and your aged debtors will drop drastically.
Usually, your largest creditors relate to the purchase of inventory. So, the longer the terms are with your creditors, the better your cash flow will be.
That is quite an obvious statement, but practically this is not always easy. However, I have some ideas that could work for you:
Identify the largest creditors, and setup meetings to see if you can increase your credit limit, or terms. Remember even an additional 1 week can make a big difference in your cash flow. If you do not ask, you will not get!
Identify your creditors that you pay cash on demand (COD). Ask them for their credit application. Often this simple step is not done, and many suppliers will gladly give you some kind of credit limit.
Identify alternative suppliers of same products. It might actually be worthwhile to only use the supplier with extended terms, even though they are more expensive. You could also have a discussion with the supplier with longer terms and negotiate their prices down, so that you win on both price and terms.
There are innumerable ways to improve profitability, many of which are more difficult than optimising one’s working capital. I will publish a blog in more detail regarding this in the future. Some of the low hanging fruits I have come across are:
Understand the cost drivers behind each product within your business, and allocate whatever costs are directly associated with these products.
Identify unprofitable products or business lines and either turn them around or remove them.
Increase your gross margin on products you believe offer some more value.
Push suppliers for settlement discounts (note this could reduce your cash flow in the short term due to worse creditor terms)
Reduce your fixed costs – go through all your cost lines or payments from your bank and identify unnecessary costs. Often admin/support costs are the easiest to reduce.
Substitute fixed costs with variable costs. Perfect example would be sales staff – pay them a lower basic, with commission based on sales. If they bring in extra sales, you will not mind paying them more.
Eliminate missed sales opportunities. Ensure you are always in stock of fast-moving products, that the sales team follows up on every lead received, all online sales with items in the basket not yet completed get re-targeted etc.
There are many ways to improve cash flow, most of which is 100% within your own control. The key is to understand the drivers within your business and know how and when to pull these levers to move your business forward.
BBO Consulting has more than 40 collective years of experience and would love to assist your company to improve cash flow and optimise your business. Contact us here for a free consultation
