6 Ways to Improve Cash Flow
Cash flow improvement may seem like a daunting task for a business. However, there are 6 key ways to improve cash flow in any business. By focusing on these 6 key areas, you will be able to make a massive improvement in your business.
Marginal Cash Analysis
The figures in the chart below relate to your Cash Flow,Â not your Profit. The chart states that for every $100 of new sales that enters into the business, the business needs to find $14.75 in cash to fund sales (see the Net Variable Cash Flow figure). Therefore, if the business were to grow, we would need access to surplus cash (ex. line of credit, overdraft, etc.).
Improve Cash Flow Area 1 – Revenue Improvement
The first step you can take to improve your cash flow is to improve your revenue. This can be done with a price increase or an average value sale increase, but not an increase in the volume of sales. In the above situation, an increase in customers will dramatically decrease the amount of cash in the business. Therefore, we must improve the price or sell products with a high average value of sale.
Improve Cash Flow Area 2 – Cost of Goods Improvement
A decrease in the Cost of Goods will help to improve the cash flow situation. This can be accomplished with a price improvement/average value of sale improvement. Additionally, you can reduce the Cost of Goods by changing to a new supplier or getting a better deal from your current suppliers.
These are a few ways you can reduce your Cost of Goods:
- Work with suppliers by tender process
- Make it known you are gathering additional quotes
- Purchasing online
Improve Cash Flow Area 3 – Accounts Receivable Improvement
Ways that you can improve your Accounts Receivable figures include:
- Collecting faster
- Getting deposits
- Progress payments
- Collecting payment at the time of delivery
Your financial reports should be able to tell you the average number of days your receivables are outstanding. In order to make an improvement, you mustÂ reduce the number of days, in comparison to your current position.
Improve Cash Flow Area 4 – Inventory Reduction
Inventory reduction is a matter of reducing the average number of days your inventory is sitting on the shelf or in storage. It is important to:
- Sell off old stock
- Buy faster moving stock
- Get stock on consignment
Again, your financial reports should be able to tell you the average number of days your inventory is still. To improve in this area, you must reduce the number of days, in comparison to your current position.
Improve Cash Flow Area 5 – Accounts Payable Increase
In this area, we actually want to increase this number. What do I mean? The key is to pay your suppliers a little slower, while still keeping within Â the terms of your contract. By increasing the amount owing to your suppliers, you will actually keep cash in your business longer. However, the money must be put to operational use; it is not for buying luxuries.
Improve Cash Flow Area 6 – Overhead Reduction
Overhead reduction is a great way to free up some money for your business. There are various ways to do this; for example, you can:
- Sub-let some of your office space
- Consider changing suppliers
If you’re still unsure how to improve the Cash Flow in your business, feel free to contact your local Business Coach Rob Carol.Â Business coachingÂ helps owners of small and medium sized businesses with their sales, marketing, management, team building and so much more.Â Call 604-942-2866 or visit www.robcarol.com/