7 Ways to improve your cashflow

Even profitable businesses can fail due to poor cash flow. The key to improvement lies in understanding and addressing its root causes.

If I had to run a company on three measures, those measures would be customer satisfaction, employee satisfaction, and cashflow – Jack Welch

The 7 Causes:

1. Cash Lockup: Delayed billing or payments.
2. Accounts Payable: Inefficient spending and supplier terms.
3. Stock Turn: Slow-moving inventory.
4. Debt Structure: Excessive or short-term debt.
5. Low Gross Profit: Insufficient profit to cover costs.
6. High Overheads: Excessive operating expenses.
7. Low Sales: Inadequate sales to meet cash demands.

1. The first cause of poor cashflow – Your cash lockup

There’s a big difference between profit and cash flow. Profit rises when you invoice for work done or goods sold, but cash increases only when you bank the money.

Your lockup is the cash that’s not in your bank account because it’s either a work in progress or you’re waiting for customers to pay.

To reduce this lockup, improve billing and collections processes.

Billing:

• Invoice customers sooner.
• Consider progress billing for long-term projects.

Collections:

• Have clear terms of trade and payment deadlines.
• Make it easy for customers to pay online or with specific methods.
• Offer discounts for prompt payment.

These changes can significantly reduce your cash lockup.

2. The second cause of poor cashflow – Your accounts payable process 

The second cause of poor cashflow relates to when and how money is spent in your business, and includes your Terms of Trade with suppliers.

When did you last review your accounts payable process?

Do you have spending budgets in place? It’s best practice to prepare an overall business budget every year, usually before the beginning of the new financial year. Make sure team members with authority to order products and services are doing so within agreed budgets.  

Now is a good time to review (and document) your Accounts Payable process, from ordering to making payment. When was the last time you reviewed your suppliers’ Terms of Trade and prices? Terms such as payment expectations, discounts, and late payment implications are worth a closer look. What controls are in place to ensure supplier payments are made on time and discounts for prompt payment are maximised? If you’re not paying suppliers on time, you need to look at freeing up cash in other areas.  

Have you recently evaluated the pricing of your current suppliers and compared this with competitors’ prices? Your evaluation should include delivery charges, payment terms, and discounts.

There are many more strategies you can employ to minimise the risk of fraud and human error, maximise prompt payment discounts, and build strong relationships with your suppliers.

3. The third cause of poor cashflow – Your stock turn 

Are your stock levels stifling cashflow in your business? Low stock turn means full shelves and an empty bank account.

Carrying stock for too long means full shelves but an empty bank account. If you’re a service provider and are taking a long time to bill for your services, then you’re carrying too much stock in the form of work in progress.

You can calculate your ‘stock turn’ by taking your cost of sales from your annual financial statements and dividing it by your average inventory (or work in progress). Most clients need some help from us to work this out, so don’t worry if you don’t understand straight away; we’ll show you. Expected stock turn rates vary from industry to industry.  

The key is to convert stock to cash faster. Ask yourself these questions:

Do you have a stocking strategy? Do you determine safety stock, desired stock levels, and re-order points for each stock category?

What software do you use to measure how much stock you have on hand at any given point in time?

What clear policies do you have to ensure you have no slow moving stock items?

How much is stock shrinkage (theft, damage) costing your business?

Do you have a formal stock ordering system so that stock levels don’t blow out?

These are just some of the ways to improve your stock turn.

4. The fourth cause of poor cashflow – Your debt or capital structure

The right debt and capital structure makes a huge difference to the cashflow in your business. 

Often a reduction in interest charges as well as significant cashflow improvements can be achieved with a regular review of existing debt. A good place to start is to list all bank loans, mortgages, finance company loans, hire purchases, credit card debts, and any other debts. 

Add columns to cover:

The amount of the debt owed

The interest rate being charged

Whether the interest is charged on a fixed or floating rate basis

Repayment terms 

Perhaps your debt can be consolidated, financed by one lender and paid off over a longer term. This will help you retain more cash in the business which is vital for growth. 

Are the drawings you take from the business for personal expenses placing pressure on cash flow? If so, that might mean that we need to look at strategies to lift the profitability of the business. It might mean that your drawings are just too high for the business to support right now. The business may need an injection of capital to fund its growth.

Getting your debt and capital structure right makes a big difference to the cash flow in your business. The first step is to prepare an updated personal budget and a cash flow forecast, then measure the extra cash the business will have as a result of making some simple changes. 

5. The fifth cause of poor cash flow: Gross profit margins are too low.

Small changes can have a massive impact on your gross profit margin and put more cash in your bank account. 

Your gross profit margin is what is left from your total sales after variable costs are deducted. For example, if your sales are $1,000,000 and the cost of goods sold is $650,000, your gross profit margin is 35%.

If you increase your margin from 35% to 39%, your gross profit will improve by $40,000. This may require increased overheads, but the investment is worth it.

There are many ways to lift gross profit, such as reducing stock shrinkage, avoiding discounting, and minimising obsolete stock for retailers. Contractors might focus on rework, wastage, and ensuring all work and materials are billed.

6. The sixth cause of poor cash flow: Overheads are too high. 

Are you in control of your spending? We can help you trim the fat but not the muscle when reviewing your expenses. 

Overheads aren’t typically a place of wastage. Business owners are careful about managing expenses. However, as businesses grow, management control can deteriorate. The trick is to trim the fat but not the muscle.

Every business should review its overheads annually. Here are some questions to ask:

• Do managers and key staff have individual expense budgets?
• Have you reviewed debt service costs and fees?
• What policies and cost control processes are in place for sales staff?
• What was your total marketing and advertising spend?
• When was the last time you renewed your IT support contract?
• List all subscriptions you pay monthly. Are you using all these services?
• Do you consider your accounting fees a cost or an investment?

Best practice is to set budgets and monitor them monthly.

7. The seventh cause of poor cashflow – Sales levels are too low

This means that your business in its current state is not viable (unless you have ongoing access to new funds from investors or financiers). 

There are five ways to improve your sales levels. These are:

1.   Increase customer retention. Stop your customers from defecting to the competition.  
2.   Generate more leads. Gain more enquiries from people who are not yet customers.  
3.   Increase your sales conversion rate. Get more of your prospects to buy from you.  

3.   Increase transaction frequency. Engage your customers to buy from you more often.  
4.   Increase transaction value. Help your customers to buy more products or services from you.

What we have found through experiencing a wide range of client situations over the years, is that certain things do work in each type of business. There’s a pattern that we see in clients – both good and bad! How does a business grow its sales without its owners becoming overwhelmed by a mountain of change? 

Without that support, we all end up in our business and never working on it. 

Wow, that was a lot of brilliant information, wouldn’t it be great if it was condensed down into an easy-to-read free printable – well it is, download the 7 reasons for free cashflow here.

Don’t have a printer or simply want the experts to handle your cashflow? Book in for a one-hour cash flow and profit improvement meeting for $375 + gst.