By Diederik van Niekerk
Cash flow improvement has been made a mystery over time, and has become elusive for many business owners. However, there are just 6 Keys to improving your cash flow in any business. This means you only need to focus on 6 areas of your business to make a massive improvement. So what are these 6 keys to success: improving cash flow?
1 – Revenue Improvement
Improving cash flow is revenue improvement via a price increase or an average value of sale increase. NOT volume of sales. More customers in the above situation will dramatically decrease the cash in the business. Therefore we must improve price or sell items of a higher average value of sale.
2 – Cost of Goods Improvement
A reduction in the Cost of Goods will help to improve the cash flow situation. This can be undertaken via a price improvement / average value of sale improvement as per Area 1. Additionally, you can reduce the actual Cost of Goods by changing supplier and / or getting a better deal from suppliers.
3 – Accounts Receivable Improvement
Accounts receivable, debtors e.g. money your customers owe you. By collecting faster, getting deposits, progress payments, 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 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, get stock on consignment etc. Implementing a stock system, bundling 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, while still keeping within trading terms of your suppliers. 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.
6 – Overhead Reduction
Reduction of Overheads / Expenses without reduction of required capabilities. For example, you would not terminate an effective sales person to reduce costs. However, you might reduce some admin personnel if they were not being fully utilised. You might sub-let some of your office space if vacant. Review your monthly costs and see where you can reduce the payment by changing suppliers, and getting rid of the cost.