Cash flow can be a make or break issue for many small businesses.
Improving cash flow is one of the biggest growth challenges for any small business.
While it’s reasonable to expect cash flow will improve when your business grows and profit increases, the reality is that growth can cause cash flow problems. This is because each sale you make needs to be funded by what is commonly known as ‘working capital’.
You can see in the diagram that when a sale is made, as many as 171 days can go by that the money isn’t in your bank account.
The simple explanation is: on day one you buy stock to sell; on day 46 you pay your supplier for the stock; on day 101 you sell the stock; on day 217 you get paid for the stock by your customer.
Between day 46 and 217, your money is with your supplier and your customer.
While this example shows a business selling stock, a business selling services or jobs has the same issue due to costs associated with labour and materials purchased to complete a job.
What’s illustrated here is that funds are required to make a sale. When sales increase, it follows that more funds will be required for business growth.
The vital question is: ‘Where is the money going to come from to fund your sales growth?’
Here are some tips for improving business cash flow.
1) Bank overdraft facility: Lenders require financials and often security.
2) Invoice finance: You get paid by the financier within days of invoicing and pay them back when your customer pays. Costs have an impact on profit, especially if low gross margin business.
3) Owners’ equity/loan: Shareholders inject cash into the business. Need to monitor return on investment for shareholders, to ensure it compensates for other investment opportunities.
4) Trade finance (for importers/exporters): Some providers have great portals that ‘smooth out’ the whole process of transacting overseas.
5) Leasing of equipment to reduce impact on cash: Interest applies, but good rates can be achieved.
6) Reduce time customers take to pay: Implement systems to chase and track payments. Systems can be very cost effective and once it’s up and running it becomes business as usual, and less of a hassle to collect payment.
7) Extend credit terms with suppliers: Analyse how much business you do with them and negotiate better terms or find alternatives. Very cheap form of finance, as suppliers normally don’t charge anything for it.
8) Reduce time stock sits in store: Implement ‘just in time’ stock management system. Think of stock as dollars piled up on the stockroom floor. A good system can do much more than just maximise stock turnover (i.e. analysis on margins by product, customer, division, branch etc).
9) Reduce time jobs are in progress prior to invoicing: Implement a job management system. A good system can help with quoting, delivering, invoicing, scheduling, materials management and profit analysis.
Once stock and job management systems are implemented they can be very easy to maintain and have a big impact on profit, cash flow, productivity, customer satisfaction etc.
Sue Hirst is a director at CAD Partners (CFO On-Call), financial and business advisers.