Cash flow is one of the most important drivers in a business. Businesses require cash flow to grow, buy new stock, pay expenses, buy assets, and distribute profits to the owners. It is important for businesses to manage cash flow as best as possible to ensure strong future growth. In our November 2017 newsletter we discussed the different elements of working capital and how they affect your business. Below we discuss different ways you can improve the efficiency of your cash flow cycle, and other factors that affect your business’ cash flow.

Improving your business’ cash flow cycle

In order to improve the efficiency of your cash flow cycle, you need to look at improvements in each of three main areas of the cycle:

Accounts payable (creditors)

• Negotiate longer credit terms with your suppliers.
• Negotiate early payment discounts with your suppliers.

Inventory

Goods-based businesses

• Order inventory to support the sales demand so you are not over or under stocked. This may require some analysis of stock and sales, and/or a more sophisticated inventory solution.
• Spread out your ordering, where possible, to spread out payments to suppliers. For example, rather than ordering huge amounts of stock once a month, consider ordering weekly or fortnightly, or ordering with different suppliers in different weeks.
• Reduce pricing on obsolete or slow moving stock to encourage sales and convert the stock into cash.
• Focus your selling on faster moving items. This needs to be balanced with other considerations such as the product profitability.
• Improve internal efficiencies to move stock more quickly once a customer makes an order.

Service-based businesses

• Use practice management software to keep track of the time that has been spent on jobs. Regularly review what time is “on the clock” to identify what jobs should be prioritised so these can be finished and billed (converted to debtors).
• Review time spent on jobs and compare to billings to identify inefficiencies. This may help identify areas where labour resources (and hence cash) are being misdirected.
• Use a workflow management system to ensure jobs are not getting stuck in bottlenecks or “lost in space”!
• Where appropriate, use casual, temporary or labour hire staff to meet staffing requirements in busy times or peak seasons. This means the cost of labour is aligned with fluctuations in sales.

Accounts receivable (debtors)

• Review and change credit terms (both credit days and credit limits) for particular customers to encourage faster payment and reduce the risk of non-collection.
• Increase sales focus on customers with good payment history.
• Offer discounts to customers who pay on time.
• Implement a debtors management process. Many modern software solutions are now available for this exact purpose.  Some software, such as Xero, have in-built debtor management functionality that allows sending of automatic reminders for upcoming and overdue invoices.

Other ways to improve cash flow

In addition to managing the cash flow cycle, the following are some other ways businesses can improve their cash flow:

• Focus on selling items with higher gross profit margins.
• Look into opportunities to increase gross profit margins.
• Look for opportunities to increase sales volumes.
• Reduce unnecessary overhead expenses.
• Defer capital expenditure to times when cash flow is better.
• Accelerate capital expenditure if it will create efficiencies in your business that will in turn help to speed up the cash conversion cycle.
• Discuss cash flow financing opportunities with your accountant and/or bank manager.

All businesses are different and have different needs however, all businesses require cash flow to operate successfully. We all know business owners tend to get caught in the day-to-day activities of their businesses, but by allocating some time to working on your business, rather than in it, you can improve your business’ cash flow.  And every business owner knows that means a better night’s sleep!