You may be surprised to know that there are just 6 key areas to improving cash flow in any business. So by working on those areas you can make a massive improvement. Here they are:
The first thing to look at is the obvious one, revenue improvement via a price increase or an average sale value increase.
2. Cost of Goods Sold
A reduction in the cost of goods sold will help to improve the cash flow situation. You can reduce the actual cost of goods by changing supplier and/or getting a better deal from them. Working with suppliers via a tender process, telling them you are gaining additional quotes or purchasing online etc. are a few strategies available in this area. Undertaken with a price improvement/average value of sale improvement as per Area 1 will see a healthy increase in cash flow.
3. Accounts Receivable Improvement
Accounts receivable or debtors is the money your customers owe you. Collecting faster, getting deposits, progress payments or 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 here is to reduce the number of days in comparison to your current position.
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 or get stock on consignment is a good place to start, or perhaps implement a robust stock control system or bundle 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.
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 but still keep within their trading terms. 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 could use credit cards BUT you need to pay off the card each month AND the card must only be used to pay creditors.
6. Overhead Reduction
Finally, an area that I regularly see businesses skipping which is auditing and reducing your overheads and expenses without a reduction of required capabilities. This can be anything from reviewing your phone contracts through to staff requirements. Of course you would not terminate an effective salesperson to reduce costs, however, you might reduce some admin personnel if they were not being fully utilised. Sub-letting vacant office space is another good example. Review your monthly costs and see where you can reduce the payment, perhaps by changing suppliers.
If you suspect your spending is a little ‘unruly’ it may be a good idea to put in a purchase ordering system that requires team members to gain authorisation prior to buying anything. If you have a system, where the team need to list the item, the cost, the reason for wanting it, and a purchase order number then you get to make a decision to spend or not before the order is placed. You also have a tracking number to check the order when the supplier delivers it. You may be surprised the number of times goods don’t arrive OR were invoiced at a much higher price.