10 Feb 5 Ways to Improve Cash Flow
You’ve heard the expression “Cash is King”. So, how do we get cash in our businesses faster and preserve what cash we have? In addition, most businesses have projected growth this year and some are projecting significant growth. Growth requires cash, so getting cash in the business faster becomes even more important than ever. Here are 5 things you need to know to get cash in your business faster.
- Collect your Accounts Receivable faster. They say, “confession is good for the soul.” So I’m confessing to you that this is an area I am focusing on right now. If you sell on terms every day’s worth of sales sitting in accounts receivable is a day that it isn’t sitting in cash. That’s a $10,000/day for a company that has $3.6 million in revenue and $100,000 a day for a company that sells $36 million in revenue. If you have to borrow that money on a line of credit at 5% interest that increases the cost of not collecting that money.
- Turn your inventory faster. If you don’t have inventory, move on to the next point. Purchasing inventory that sits on the shelf and doesn’t turn is a cash drain. If you have a seasonal business and bought inventory for the holidays, you may be sitting on some inventory that you wish you didn’t have. You have a choice. You can either have a sale or sit on the inventory until next season. To get cash in the door faster, I would suggest a sale. It’s better to have the cash even if it is at a slightly lower profit margin.
- Pay your Payables a little slower. Please understand I am not suggesting that you pay your vendors later than the terms granted. What I mean by this is there is a common thought that some owners put a value on early payment. Even if I get 30 days terms, I’m going to pay this vendor in 15 days to somehow get better terms. If the vendor wanted better terms he would offer a discount for early payment. I would submit that your vendors don’t give “brownie points” for early payment. So, keep your cash in your business and pay within terms. If you want to pay early, see if they would offer you a discount if you do. 2% discount for payment in 10 days is reasonable.
- Eliminate Mistakes. Nothing slows down collections like errors. Errors in invoicing, errors in shipping orders or product delivery can create delays in collecting cash. To eliminate mistakes, it takes a business owner to understand what the issues are. Mistakes can creep in to your business through people issues. You don’t have the right people doing the right things right or you may have developed systems and processes that have caused redundancies to the point where the business is just slower. Every business makes mistakes, but it’s how these mistakes are dealt with that can speed up cash collections.
- Improve your Business Model. Spend some time with your leadership team or trusted advisor to take a hard look at your business model. Is there a way to do it better? Most business owners review financials that are backward looking and don’t understand that the past performance may not correlate to future growth. You have to count the cost of growth and then calculate how much revenue is needed to cover to determine if your growth business model is viable. Since cost almost always comes before revenue flow, the business owner has to look at monthly financials to see if he’s on track or not. Whether the investment is in people, technology, or equipment, the owner must calculate the amount of revenue needed to cover the investment. If it can’t be covered then it may require continuing the existing business model until you figure out how you can pay for it.
So, how do you get cash faster in your business? If you have any questions about cash acceleration strategies, please Contact Us to discuss it further.