5 Ways to Improve Cash Flow

If we are having a conversation about your business finances, you will likely hear me talk a lot about cash flow. So, what is cash flow exactly? In the most simple terms, cash flow is the movement of money in and out of your business. I’m sure you’ve heard the expression “cash is king” (or queen ) and there is a reason for that. Cash allows you to invest in your business and provides stability to drive future growth.

Below are 5 tips to help you improve your business’ cash position.

Tip #1: Increase revenue

This seems like a no brainer but it is worth mentioning and breaking down a bit. There are two components to revenue: price and units. Increase your prices – more cash. Sell more units – more cash. Sounds simply, but small changes in each can have a significant impact. For example, lets say you own a bakery and your average price for a cake is $20. If you increase your price 10% – which is only $2 dollars to the consumer – and you sale 50 cakes a day, that is an extra $100 in 1 day. Let’s say you are open on average 4 days a week for 52 weeks which is 208 days a year, you are now making $20,800 more in a year (all else being equal). If you are an establishment with a loyal customer base and good products, an extra $2 will not deter customers from buying from you. As, always though with any price increase you have to be mindful that your prices remain competitive and are not so dramatic that you run the risk of driving customers away. Be thoughtful with your pricing, understand how small changes can add to your bottom line and cash generation.

Tip #2: Optimize costs

Reviewing your cost structure should be a regular part of your business operations. Make sure are getting best possible prices from your suppliers and managing your labor and overhead expenses. Always look for ways to lower your costs. Work with your suppliers to ensure you are getting the best prices. Align your workforce to maximize productivity. Make sure the money you spend on marketing and advertising is generating a ROI and if its not, pivot to a different strategy.

Working capital management is another way to improve cash flow. Working capital is the difference between your current assets and current liabilities and is a measure of your businesses short-term liquidity. A few ways to manage this liquidity are:

Tip #3: Lower accounts receivables

If you allow customers to pay for items on credit, there may be a lag between when you recognize the revenue at the time of a sale and when the cash is actually in your account. You can provide incentives to ensure customers pay you in timely manner. Don’t be afraid to collect on past due invoices. If customers have recurring payments, set them up on an automatic payment process, so you know when you get the cash. Holding a large accounts receivable balance reduces your overall cash position.

Tip #4: Manage inventory levels

if you are a company that holds inventory, management of your stock is vital for cash generation. Reducing the amount of stock you keep on hand will keep the cash in the bank rather than sitting in unsold merchandise. Keep your inventory to a level that won’t impact your ability to fulfill orders, but minimizing having unused items sitting idle in a warehouse or on your store shelves.

Tip #5: Lengthen accounts payable days

If you are a company that holds inventory, management of your stock is vital for cash generation. Reducing the increasing the time you take to pay creditors can also improve your cash flow. For example, if you have net 30 day payment terms with a supplier, don’t pay them in 5 days. Increasing your accounts payable days will result in an increase in cash. Now of course, you will still need to pay those creditors, but being mindful of WHEN you pay them is crucial. Here is an example. Lets say the same bakery books a large catering event that requires them to purchase a significant amount of flour, butter, sugar and other baking goods. They have to make this purchase before they may get paid by the vendor for the event who has net 15 day payment terms. It would be ideal to buy the materials for the event on credit at net 30 day payment terms – therefore no immediate cash outflow- and wait until they get paid by the vendor and use those proceeds to pay off the creditor. In this scenario the timing of invoicing the vendor and paying the creditor ensures the bakery maintains its cash position throughout the transaction.

In conclusion

Managing cash flow requires a certain level of attention to your business finances but being able to generate and keep a certain amount of cash is paramount for any sustainable business.