Cash Is King

Cash flow is one of the most important drivers in a business. Businesses require cash flow to grow, to buy new stock in order to generate future sales, to pay expenses, to buy assets, and to distribute profits to the owners. In the current financial environment, banks are no longer lending cash easily and, therefore, it is important for businesses to manage cash flow as best as possible.

How can you manage your business’s cash flow?

The most important way of managing your cash flow is to understand the cash flow cycle of your business.

In a trading business, the cash flow cycle is the time from when a business buys its stock until its customers pays for the stock they buy. In a service business, the cash flow cycle is the time from when a business pays its wages until its customers pays for the services provided to them.

The main components of the cash flow cycle are:

Number of days from when stock is purchased until the stock is sold
Number of days from when stock is sold until the customer pays for the stock
Number of says from when stock is purchased until the business pays its supplier

By calculating and analysing the above cash flow cycle components, you may be able to identify opportunities to improve your cash flow.

What other drivers in your business effect cash flow?

In addition to understanding the cash flow cycle of your business, some other ways your business can improve its cash flow are:

Increasing gross profit margins
Reduce overheads

What can you do to improve your business’s cash flow?

After calculating and understanding your business’s cash flow cycle, analysing your business’s gross profit margin, and reviewing overheads, some of the areas you may work on are:

Suppliers/Creditors

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

Customers/Debtors

Review and change credit terms for particular customers
Increase sales focus on customers with good payment history
Offer discounts to customers who pay on time
Implement a debtors management process

Inventory

Order inventory to support the sales demand so you are not over stocked
Spread out your ordering, where possible, to spread out payments to suppliers
Reduce pricing on obsolete or slow moving stock to convert it into cash
Focus your selling on faster moving items
Focus your selling on items with higher gross profit margins

Other

Reduce unnecessary business expenses
Look into opportunities to increase gross profit margins
Defer capital expenditure to times when cash flow is better
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. By allocating some time to “working on your business” and managing your cash flow, you can definitely ease the pressure and achieve better results.

If you have any questions in relation to this article or would like further assistance with managing your cash flow, please contact Catalyst Financial on 8064 5362.