Business owners face many challenges today – cash flow being one of the most challenging. Attracting and retaining top talent, marketing strategy and establishing a strong brand, business growth, time management and delegation, and communication are also on owners’ minds. But from a financial perspective, cash flow is often the biggest problem owners face today. This is a result of the timing of performing services, invoicing the customer, receiving payment from the customer, paying vendors and employees, and managing operating expenses. Most businesses need to be more profitable and need to improve cash flow to do all these things well. That goal gets especially complicated if certain seasons are slower than most – like summer.
Monthly revenue fluctuations can cause havoc in forecasting your results and cash flow. But since a steady cash flow is a vital part of a healthy business, there are steps you can take to increase it no matter what the season.
How to Increase Your Cash Flow
- Work your accounts receivable. The squeaky wheel gets the grease. Make some phone calls to speed up collections. Consider reducing credit terms offered. If accounts receivable are a significant portion of your balance sheet, measure and graph days sales outstanding (DSO) monthly. DSO is calculated as follows: accounts receivable ÷ (credit sales ÷ days in the period). I generally like to use 3 months of sales ÷ 90 days to calculate average daily sales divided into accounts receivable.
- Reduce your inventory levels. The number of days on hand is the number of days it takes from inventory purchase to sales (i.e. how long product sits in the warehouse.) The lower the days, the more frequent the turnover and better cash flow. Measure monthly and look to reduce the days on hand. Lower inventory balances do increase stockout risk so you do need to be careful reducing inventory too much.
- Push accounts payable. Can you negotiate longer terms or quick pay discounts? Remember the value of a quick pay discount is very substantial if you have adequate working capital.
- Increase profitability. This isn’t always easy, but look at low-margin products and focus on operational efficiency. Sometimes tasks and projects take your team’s time because you give them time. If I give you 30 days to clean your house, it will take 30 days. If I give you six hours, you’ll be amazed at how much you’ll get done in six hours.
- Put a line of credit in place. This helps provide a safety net when needed, especially during slow periods.
- Consider creating a cash flow contingency fund. The next time you are in a more profitable season, set aside funds that can help with cash flow in the slower seasons.
- Stay on top of records! I create a rolling 13-Week Cash Flow worksheet for all my clients, update it weekly, and develop strategies for asset velocity (accounts receivable, inventory, accounts payable) and profit enhancement.
- Practice good budgeting and planning. A realistic budget, and plans that take slower seasons into consideration, is a huge help in leveling out cash flow concerns.
Which of these steps do you need to focus on most? If you don’t have the time to do these things yourself, it may be time for a fractional CFO. Contact me today for a free initial consultation.