The three most important things to measure in a business are customer satisfaction, employee satisfaction and cash flow –Jack Welch, former CEO General Electric
Successful business owners understand the importance of cash flow. Managing cash flow is just as important as managing profitability. Many profitable businesses have failed because of poor cash flow. Likewise, a number of unprofitable businesses have managed to delay failure by maximising the available cash flow. Understanding and managing the cash flow in your business is essential to business success.
The implications of business growth on cash flow are often underestimated. A growing business can suffer cash flow pains as a result of:
- An expanding debtors ledger
- Additional inventory being held
- Costs associated with hiring, training and equipping new employees
- Additional assets required to meet customer demand
Cash flow needs to be:
- Positive (i.e. there is more cash coming into the organisation than going out of it)
- Available (i.e. the assets must be sufficiently liquid so as to be available to meet costs)
- Timely (i.e. cash inflows must be timed to come in before the cash outflows are due)
What Should I be Doing?
Surprisingly, many organisations don’t have a cash flow plan. To know how much cash you need, and when you will need it requires a cash flow plan. A cash flow plan is a cash budget which should at the very least be broken down into individual months. The cash flow plan will help highlight the cash flow peaks and troughs of your business so you can develop a strategy to manage it.
What Can Help My Cash Flow?
1. Increase revenue. This can be achieved by:
- Increasing the number of customers you have
- Increasing the frequency of when your customers buy from you
- Increase the average value of each customer transaction
Beware – increasing revenue can add to your cash flow pain in the short term.
2. Have a clear, documented debtor process to maximise the speed in which you are paid. Make sure every new client clearly understands your credit terms and payment expectations. Offering a discount for early payment may be appropriate. Likewise requiring a deposit may aid bankings. Use template letters and agreed scripts to chase up overdue debtors.
3. Cost cutting – make sure you reduce all unnecessary expenditure. Having said this, remember that no organisation has ever shrunk its way to greatness. There are long term implications of reducing expenditure on items such as marketing and team training.
4. Utilise available credit – Pay your bills as they are due but not before they are due. Make the most of the credit terms you are offered. Can you get better terms from some of your suppliers?
5. Communicate early – your cash flow plan will highlight the key pressure points. Once you have identified any problem periods, act and communicate promptly. Your suppliers and financiers will appreciate early communication.
Your local MSI advisor is also a business owner. They have first-hand experience dealing with their organisations own cash flow issues. This places them in a unique position where they are able to offer practical real world help.