6 Ways to Improve Your Cash Flow
As a business coach, I work with a lot of business owners who struggle to maintain and improve good cash flow. While it can feel like cash only flows one way (out of your business), it does (or should) flow into your business as well. To start making a significant improvement to your cash flow, focus on the following 6 areas:
#1 – Improve Revenue
To achieve revenue improvement, you can increase your prices and/or increase your average value of sale. Note: this is not the time to focus on volume of sales, because more customers in the above situation can actually decrease the cash in the business. Therefore, start first with improving prices or selling items of a higher average value of sale.
#2 – Reduce Cost of Goods
One way to quickly reduce your Cost of Goods is to change suppliers and/or renegotiate a better deal from your current suppliers. There are numerous strategies for securing a better deal, including working with suppliers via a tender (or bid) process, purchasing online, and telling your current suppliers that you are seeking additional quotes.
#3 – Improve Accounts Receivable
Accounts receivable is the balance of money due to a company for products/services that were delivered to a customer but not yet paid for. In other words, it is the money that your customers owe you. Outstanding invoices are an example of AR.
Your financial reports should tell you the average number of days your receivables are outstanding. The goal should be to reduce the number of days in comparison to your current position.
Some ways to improve this figure include collecting payments faster, having your customers pay deposits, and collecting payment at the time of delivery.
#4 – Reduce Inventory
One of your overarching goals should be to reduce the average number of days your inventory is sitting around. Just like with your AR, the idea is to reduce the number of days in comparison to your current position. Some ideas for this include selling off old stock, bundling slow moving items (at a discount) with faster moving items, buying faster-moving stock, and implementing a stock system.
#5 – Increase Accounts Payable
Increasing the amount you owe to your suppliers will keep cash in your business longer. The key is to pay your suppliers slower (while still keeping within their terms). With this area, you want to increase the number of days in comparison to your current position.
The important thing to remember here is that the money must be put to operational use and not be spent frivolously.
#6 – Reduce Overhead
There are ways to reduce overhead and/or expenses without reducing required capabilities. For example, while you wouldn’t want to terminate an effective salesperson to reduce costs, you may want to consider reducing an admin employee if they are not being fully utilized. In addition, you could sub-let some of your vacant office space, or you could review your monthly costs to see where you can reduce payments by changing suppliers, getting rid of the cost, etc.
Another way to monitor your company’s spending is to implement a purchasing order system. Doing so will require team members to gain authorization prior to spending money. Many businesses I work with have an “after the fact” system where employees spend and then it’s too late.
Your cash flow— the amount of money moving into and out of your business—is a big indicator of the health of your business. By focusing on these six key areas, you can start to identify your company’s hidden “gold mines” and dramatically boost your bottom line.