Business owners focused on doing ‘the work’ often take their eye off the lifeblood of their business; cash flow.
Without cash flow, businesses struggle to pay debts and pay you, the owner. Managing cash flow and driving cash flow improvement is just as vital to a business as a clear revenue strategy. You cannot afford to ignore cash flow management.
The cash flow improvement formula for a healthy business should:
- Drive debtors down
- Drive stock holdings down
- Maintain creditors at terms
So that surplus cash exists to:
- Make asset purchases
- Pay debts
- Pay dividends and drawings to owners
Managing cash flow by focusing your strategies on these areas will give you confidence in the business decisions you make.
The formulas and KPI’s for managing working capital are:
Using current year sales of $5,000,000, a cash flow improvement of $103, 000 can be achieved by a 10% improvement in debtors and stock days and continuing to maintain creditors days in line with supplier terms as shown below.
You can see with a few simple strategies, you can improve cash flow significantly.
In summary, the Top 5 Cash Flow Strategies for your business to drive cashflow growth are:
- Ensure your customers have signed off on their order prior to commencing work and have agreed to your terms.
- Issue your invoices at the earliest possible time but after you have received the signed order.
- Rigorously implement a debtor collection process to collect all debtors on terms.
- Assess your minimum stock holding per stock item and only order when needed and make a focussed effort to clear and sell old or slow moving stock items.
- Maintain your supplier payment terms to ensure you receive stock when you need it.
To review your current cash flow strategy and determine what is possible in terms of growth from your business, call elliotts on 07 3833 3999.