Business Owners of SMME businesses are today, severely challenged to ensure that their businesses maintain a positive free cash flow. Cash flow as we know it is the blood that keeps the business gears working and an essential part of running a commercial profitable business enterprise.
As 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. 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 and they forget to manage the cost of sales. A 5% difference in gross profit can make a huge difference and managing the purchase price or manufacturing costs in your business is essential in being profitable.
Not only is it important to manage your gross profit in Rand and percentage; but you should also know what it must be to break 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 that the ActionCOACH 5 ways leverage system is uniquely positioned to assist you with this.
2. Shortening your cash gap
Your cash gap is the time delay between when you have to pay your suppliers and 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 government could break the business if your suppliers aren't committed
Corporates are also known to delay payments easily from 30 to 60 days and if they are a major part of your business, how do you pay wages, electricity and yourself at month end?
Figure 1: Cash Gap Visualised
Strategies for shortening the cash gap could include things like 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. Other strategies would include to get clients to pay COD of 7 days from invoice as well as running 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-up and to continue to ask 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. Decrease or Delay Spending
Being an astute financial manager means to control the collection as well as the spending of the company's money. Too often I see entrepreneurs making business decisions based on the money in the bank and not what the money should be used for. 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.
Doing weekly cash flow forecasts bring an amazing amount of clarity on what this 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!
We often feel that managing through a cash poor period in our business is all about managing costs. Being cash-rich however is a little more complex; it's about ensuring we have a have the income to pay the bills.
The benefit that cash-rich companies have is that they there is a great deal of money available to spend, immediately on acquisitions and as a result they have the means to build their portfolios in a rush.
Talk to me about developing your business strategies, your team and your cash flow.
The Business Masters
If you would like to SUBSCRIBE TO OUR NEWSLETTER please CLICK HERE