When you own a business where your top line proliferates, increasing profits yearly, you’re moving in the right direction. But don’t think you’re in the clear just yet. Many successful businesses can experience cash flow issues when their finance, investing, and operations activities are misaligned or inefficient.
The first Habit of Profitability is to move from a negative cash cycle to a positive cash flow.
Positive cash flow is receiving payments before cash outlays. It’s important to keep certain factors in checks, such as the timing of your payables and receivables, especially if you receive crucial payments on an irregular or quarterly basis. One of the last problems you’ll want on your hands is failing to pay bills or employees on time.
Still, while less extreme, improper cash flow management can prevent your company from achieving meaningful, comprehensive goals. Ultimately, this leads to less profit year over year while bottling your potential.
Luckily, managing cash flow can be broken down into its components, and you can take the necessary steps to get your finances in order and promote smart business growth. Let’s examine some of the key ways to improve cash flow.
What is Cash Flow?
People throw the term “cash flow” around freely, but many don’t fully understand its meaning to their business. Cash flow is the net cash going in and out of a business.
Traditional practices such as billing after the month ends and providing n/30 payment terms cause a negative cash cycle where essentially cash expenses are paid ahead of cash inflows from customer payments. To accelerate cash balances and increase the value of your business, you want to achieve positive cash flow.
Successful companies can take control of their cash flow through normal business operations. Inflows, or capital coming in, include revenue from sales and investments. Outflows, or cash going out, consist of any expenses, including debts. Managing cash flow properly allows you to meet your bottom line easier and make room for new ideas.
1. Cut Unnecessary Spending
First, you’ll want to thoroughly examine your spending, ranking your expenses in order of priority or importance. In doing so, you might notice some loose ends – like extra office space you don’t utilize – and cut them out on the spot. Some of these expenses might seem small, but they’ll truly add up, especially when considering monthly or weekly payments. Cutting them out will drastically increase cash flow.
Dedicate time to business expense management, and you’ll access new capital to allocate to business expansion and upkeep. If your business operates in a seasonal industry, examine your yearly expenses. You may find that you don’t have to be using the same resources for half of the year as you do the rest, allowing you to reduce costly expenses and maximize cash flow further.
2. Study Your Cash Flow Patterns
Next, you’ll want to take a proactive approach. Your negative and positive cash flow swings likely occur in a pattern and sifting it out will allow you to gain greater control over your capital. Perform a cash-flow analysis and investigate your business history. Find trends, identify cash flow variances before they occur, and prepare accordingly.
3. Lease, Don’t Buy
While buying equipment, office space, and other resources can offset the cost of renting yearly, many business owners don’t have the raw capital needed to afford their top-priority expenses. Leasing allows you to improve your cash flow, freeing up the capital you need to maintain steady operations and expand. Likewise, owning equipment means responsibility, leading to costly repairs and maintenance costs to keep everything running smoothly. Commercial leasing agreements often include servicing, allowing you to avoid upkeep costs.
4. Experiment with Pricing
Now is a GREAT time to raise prices. Those increases go right to your bottom line! Many business owners shy away from increasing pricing on their goods or services, as, in some instances, this can lead to fewer sales. However, refusing to experiment with pricing options might hold your business back from improving cash flow. See how high you can increase your prices without pushing customers away. Conversely, lower the costs of certain services to see if this yields higher sales overall.
5. Negotiate with Suppliers
If you’re running a solid ship, you’re maintaining positive relationships with everyone you do business with. This includes proper communication. If you’re on good terms with your suppliers, you have a better chance of negotiating better terms. Examine what you’re willing to offer your supplier in exchange for a better deal. For example, offer early or bulk payments in exchange for a discount. Negotiating is key in all aspects of business, so don’t forget to use it here to improve cash flow.
6. Inventory Churn
Accelerating inventory is frequently worthwhile because every dollar of inventory is tied up in working capital. Calculate your inventory turn for each product category compared to your industry benchmark. Run “what-if” scenarios to figure out which best practices liberate cash for you. Check physical inventory for accuracy and ensure that stale goods go on clearance. For one client alone we freed up $498,000 of working capital.
7. Bill Customers and Collect Fast
Blow up traditional thinking about billing customers and collections. I am not sure who thought up billing one or two weeks after the month ends then giving the customer 30 days to pay your invoice. If your customer pays on time, the cash receipt will be three months from when you actually did the work. This means that you needed the working capital for six payrolls, three rent payments, material expenses, and the related cash outlays before you get paid.
Instead, examine your billing practices without the constraints of the past. Can you get pre-paid, get a deposit, automatically charge credit cards, bill twice a month, etc.? In a similar fashion measure, your collection practices – what is your Day Sales Outstanding (DSO) compared to industry benchmarks? What terms and practices could you put into place to do even better?
How Foresight CFO Is Different from Other Outsourced CFO Services?
Our experienced Growth CFO team at Foresight CFO has worked collaboratively with hundreds of CEOs worldwide to bring meaningful financial insight that clarifies their strategic direction. Schedule a 25-minute discovery call with me, and we will discuss you & your business, what you want, and what is getting in the way.