8 Ways to Improve Cash Flow
Your business, just like a car, has many moving parts to keep it running. Every part is important and reliant on other parts to operate however without cash in the business or petrol in the car they simply won’t get very far. ‘Cash is King’, we all know this saying and it is definitely true.
Every moving part affects cash flow and below are some tips on how to ensure all of these parts are running effectively to support a healthy positive cash flow:
- Make a Profit – This is obvious as no profit means no surplus funds and your cash will inevitably go backwards, however profit does not mean that you will have positive cash flow. I’ve seen highly profitable businesses struggling to survive due to poor cash flow crippling its operation. Refer to 10 ways to maximise profits and reduce corporate stress.
- Ensure Customer Invoices are Paid on Time – Implement an Accounts Receivable policy to ensure you are working with reputable customers who are able to pay and pay on time. Have a process for collecting your invoice payments on time. Refer to How to build a watertight accounts receivable process.
- Align Customer and Supplier Terms – If your suppliers require payment of their invoices within 14 days but your customers aren’t paying you before 30 days then you will always run into trouble if you don’t have a healthy bank balance. Seek to have your supplier terms longer days than your customer invoice terms.
- Improve Inventory Management – Every bit of inventory you have in stock is idle cash. Know your best-selling products and your less popular products and order accordingly. If you have too much of a less popular product on hand, discount the products to get them sold. Cash in your hand is more valuable.
- Forecast when Quoting and Tendering Projects – When you are quoting or tendering for a project try to have your milestone payments as evenly spread as possible. If doable also try and work into the quote or tender a deposit requirement to get started or a payment due on signing the contract. From the day a project starts, if your business works on 30 day terms with its customers and you invoice at the end of the month this could mean that it will be almost two months before your first payment is received after the project has started. In that two months you will need to pay employees and contractors working on the project and also any material required before the first payment is received leaving a large hole in the bank balance.
- Lease or Finance Assets, Don’t Buy – Most of the time the assets you buy are depreciating in value over time. Don’t tie your cash up in something that is losing value. Keep your cash in the bank and use finance to purchase an asset.
- Forecast Growth – When a business is going through a large growth phase and it ramps up really fast, it is really exciting but most of the time the cash flow will suffer. There needs to be some large inventory purchases or hiring of more staff or some big asset purchases to support the growth however the revenue and profits from this growth may not be seen for a couple of months if you are working on 30 day terms with your customers.
- Do Budgeting, Revenue Projections and Cash Flow Modelling – Do a budget for the year including a revenue projection to know what lies ahead. What are your good months and what are your bad months? Put all of this information into a Cash Flow model which takes into account all of your income, expenses, liability payments and bank balances including the timing of these payments to see when cash will be tight. This will allow you to plan for the rainy day and assist in making various purchasing and business decisions.
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