Cash Flow: The Lifeblood of Your Business

The latest MYOB Business Monitor Survey for April showed that the leading concern for most of the 1000 owners they surveyed was around cashflow issues. With current estimates indicating that approximately 90 per cent of business failures are the result of poor cashflow, the level of concern is hardly a surprise. Don’t let your business be one of them.

Maintaining smooth cash flow requires juggling nearly every facet of a business, from staying on top of accounts receivable, to extending lines of credit, to managing inventory. The essence of successful cash flow management is regulating the money flowing in and out of your business, to reduce the amount of fixed capital that you need to support the given level of your business.

A lot of business owners we talk to often suggest that the way they want to increase cash flow is to increase sales. Strange as it may seem, this can kill a business faster than by doing nothing. The reason is that the business may be “cash negative” (consuming more cash than it generates) and so the extra sales generated need to be financed by additional borrowing or capital injection by the owners. This can drive the business into a worse position than it already was. It is essential that a Net Variable Cash Flow analysis is done on the business FIRST before additional sales are chased.

I can do this for you at no cost so either email me to make an appointment or contact me through the website here: Cashflow solutions

So, what can be done to turn a negative Net Variable Cash Flow situation into positive territory? Try these ideas to start:-

1. Organize your billing schedule

The faster your receivables turn over, the more capital you'll be able to spend on growing your business. Make sure you send bills out promptly each month and put in a system to flag any overdue accounts for immediate follow-up. Put in a documented credit management system and stick to it.

2. Stretch out your payables

Take the maximum amount of time allotted (often 60 or 90 days) to pay your suppliers. Think of these terms as an interest-free line of credit from your supplier. It gives you sufficient time to collect receivables without spending money on short term credit lines. Perhaps use the interest free period afforded by credit card companies and use your credit card for purchases. Just make sure you pay it all off on the due date!

3. Take advantage of early payment incentives

If your suppliers offer you a discount for paying early, take them up on it. Think of it this way: a 2% on a 30-day invoice is equal to a 24% annual return if the money was invested. If your suppliers don't offer this kind of incentive, ask for it; they may be willing to offer the discount in return for speeding up their receivables.

4. Balance your client base

Is there any opportunity to change some of your clients into a regular paying regime (retainer for a set number of ongoing services), rather than a project-by-project basis only? This may reduce profitability a little, but will help to smooth out cash flow. Institute a deposit system for larger projects where the client pays something up front and regular progress payments.

5. Check your pricing

When was the last time you raised your prices? Many small businesses hesitate to increase their rates because they're afraid they'll lose customers. However, customers actually expect their suppliers to institute small, regular price hikes. Also, check out your competition on a consistent basis. If they're charging higher prices, you should too.

6. Reduce your inventory

Liquidate older inventory by having a sale and turn that stock into cash. Once you have done that be careful of bulk offers by sales reps that can result in becoming over-stocked again. It is tempting to take advantage of a seemingly great offer by a persuasive sale rep, but how fast can you sell all that extra stock and what extra margin will you make?

Once some of the strategies listed above have been implemented and the business is stable and has a positive Net Variable Cash Flow, you can go out there and chase those extra sales, safe in the knowledge that the bank balance will be going up, not down.

You can find out more here: Coaching in business

Andy Burrows

Senior Advisor - Icon Business Solutions

Email: andyburrows@iconbusinesssolutions.com

Web: www.iconbusinessolutions.co.nz

Icon works with the owners of independent businesses to help them make more MONEY, build better TEAMS and allow the owner to spend MORE TIME where they want to.