Business Owners today are severely challenged to ensure that their businesses maintain a positive cash flow. Cash flow, as we know, is the lubricant that keeps the business gears working. it is an essential part of running a commercially profitable business enterprise.
As a Business Coach, I have seen the challenges that business owners face in meeting their day-to-day payment requirements and the following 4 strategies are used by the better-run companies to manage their cash flow.
1. Firstly, increase your free cash flow
Typically, the best way to manage free cash flow is to ensure that you have a healthy gross profit in your business. Too often business owners look at turnover only but they forget overlook the cost of sales. A 5% difference in gross profit can make a huge difference! Managing expenses or manufacturing costs in your business is essential to becoming more profitable.
Not only is it important to manage your gross profit in Rand and percentage; but you should also know if you are breaking even.
Strategies to increase your gross profit could include:
- increasing your selling price (might be your only choice),
- decrease your cost of purchasing, and
- increasing the volume of goods sold without giving away discounts.
Remember ActionCOACH has a 5 ways leverage system which is uniquely positioned to assist you with your strategies.
2. Secondly, shortening your cash gap
Your cash gap is the time delay between when you have to pay your suppliers. Along with when you can expect to be paid by your customers.
For the SMME business owner, a critical aspect of accepting a sale could be the payment terms. Working with slow payers like big corporate companies and the government could break the business. If your suppliers aren’t committed to paying timeously.
Corporates are also known to delay payments easily from 30 to 60 days or longer. If this is a factor, what contingency plans do you have in place to pay your business expenses, wage, and yourself at month end?
Strategies for shortening the cash gap could include:
- paying a deposit of 40% or 50% on acceptance of the order. Specifically if the cost of goods sold is high like when selling capital goods.
- get your customers to pay COD or 7 days from the date of invoice, and
- implementing just-in-time stock replenishment systems.
3. Improving your debtors book days
This is about reducing your financial investment in your customer’s business. They have received the product or service and now it’s time to pay. Having a system for follow-ups to continue asking your customers for payment once it’s due, is crucial.
Strategies for reducing the amount of cash that’s tied up in debtors could include;
- having defined credit policies,
- improving collection efficiency through e.g. debit orders and timely reminders, offering discounts for early payments, rewarding timely payments, and
- penalties on late payments.
4. Lastly, decrease or Delay Spending
Being an astute financial manager means controlling the collection as well as the spending of the company’s money. Too often I see entrepreneurs making business decisions based on the money available in the bank. Having a budget and measuring yourself against it on a monthly basis is what is required. Put a plan together to reduce overheads by 10% and see what the effect is.
In conclusion, Doing weekly cashflow forecasts can bring an amazing amount of clarity on what the week’s priorities should be, and yes it is a forecast. But can you imagine what it would feel like to have a view of the cash position at month-end, today!
Is your business cash-poor or cash-rich?
Let’s connect to have a meaningful conversation on how we can create a cash-rich culture in your business, today.
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Let’s grow your cashflow and profits, together.
Yours in great business,