Cash Flow is King
As the saying goes, cash flow is king. When managing a real company, accounting 101 starts to make real sense. Showing a profit is great and important, but what happens when there is no money in the bank. How can there be profit, but no cash?
In business, revenue and profit are secondary to cash flow and managing cash flow is key to a healthy business. Healthy cash flow means funds to fuel growth, reinvestment, paying off debt, and most importantly, paying shareholders.
Let’s dive into five ways to improve the cash flow in your business.
#1 – Raise prices
Raising prices is tough. There is a fear of losing good customers and this fear is often speculative. Customers often associate price with quality and high quality along with great service outweigh the pain of paying more.
You can accomplish this by building relationships with your customers and communicate with them often. De-commoditizing your products or services will help you remain unique in your industry.
The cost of raising prices is almost nothing and the effort is minimal. The result will be to extract more cash from the existing customer base. Non-ideal customers will likely seek out another option in the process.
#2 – Receivables
If your business invoices for work performed or products sold, your cash flow cycle is much longer. On the plus side, you may not be sitting on inventory, on the negative, you’re paying expenses and wages (and sales taxes) long before the cash comes in. This is a beast on cash flow.
You need to shorten the billing and collection cycle. Get the work done/product delivered, get it billed and get it collected. Have someone accountable for each stage in the process. You don’t want a customer withholding a $10,000 final payment because a $50 issue needs resolution. You can also ask for partial or full-prepayment and make sure you negotiate payment terms. Payment terms should never be more than 30 days without building a little extra into the price. Offer discounts for quick payment.
Providing services or products without payment is risky. Payroll is being incurred daily and paid biweekly. Purchasing, handling, and storing goods for resale costs money. Without strict rules and processes customers will widen the period between service and payment causing cash flow to worsen. Be firm about collection.
#3 – Payables
Randomly paying bills is the bane of a healthy cash management system. Paying bills should be routine and predictable. If a vendor is offering 30-day terms, take it, even stretch it a little.
Bills should be paid twice a month; maybe on the 10th and 25th for example. Bills should be approved for payment. Is the service or purchase complete? If not, contact the vendor and say “we went to pay the bill but realized something wasn’t done yet. Can you get it done asap?” Now you have at least 15 more days to before you need to part with your cash. This is a much better approach than being silent and the vendor not knowing why.
Creating a rhythmic relationship between payables and receivables creates confidence in management. High confidence means execution of new initiatives and opportunities happens quicker and more successfully.
#4 – Resource utilization
Most businesses leverage at least one of raw materials, fixed assets, or labour. Sub-optimal use of any one of these can create an invisible drain on your cash flow.
There are many ways to accomplish and measure this. Maximize the return of investment (ROI) of your fixed assets, maximize your employees’ productivity before adding more, and reduce or eliminate waste in your manufacturing process of raw materials. Compare the cost of labour to revenue to industry standards and monitor periodically. Evaluate the use of your fixed assets and sell off excess assets or lease them out.
You may be able to generate more cash from your existing cost structure and this will increase your ROI. Also, employees that are more productive and earn more are often more energized and motivated. This creates a win/win situation.
#5 – Lower your overhead
Over time, routine expenses add up. You need to review your expenses at least quarterly and trim when necessary.
For this to work, you must keep an organized profit and loss statement and review line by line and account by account on a regular basis. Marketing, office expenses, travel, subscriptions are just some examples where businesses often overspend. Focus on expenses, especially expenses that recur monthly, without any attributable return on investment and cut them or remove them altogether.
If you want proof that cash is king, industry leaders have 3 times the amount of cash on hand compared to industry averages. This strong cash position allows these companies to jump on new opportunities as the present.
If you found this helpful, consider that over a hundred local private businesses turn to us, not only for accounting and tax advice, but as business advisors as well. Make us part of your advisory team.