Cash is the lifeblood of every successful business; insufficient cash will cause a business to fail and strong cash flow will allow a business to thrive and grow. 

How can you successfully manage your cash flow to grow your business? 

Visibility

It is crucial you understand the drivers of your cash flow. How long does it take from converting a sales lead to the collection of cash? What are the friction points in your cash cycle? Can these frictions be reduced or removed?

To aid your understanding of cash flow dynamics, it is important to regularly prepare cash flow forecasts, by doing so you will gain visibility on the future cash flow needs of your business. 

It is beneficial to forecast multiple scenarios to examine the impact of changing business conditions and different business decisions have on the business’ cash flow position. Useful variables to review include the following:

  • Impact of changing selling prices;
  • Impact of changing volume of products/services sold;
  • Impact of discounts on early payment of debtors;
  • How incentive structures can impact both the top line and bottom line;
  • How reduction of expenses impacts the bottom line;
  • Changes to taxation regimes;
  • Impact of additional capital expenditure; and
  • Changes to the workforce, for instance additional sales people, additional administration staff.

Once you have a forecast model that allows you to assess the impact of various scenarios, you can start to make real business decisions with confidence on how the business will be impacted. This sort of analysis should be used in conjunction with the business’s strategic planning process to ensure the viability of decisions.

By implementing the above tools and practices, you will gain crucial visibility of the current and forecasted cash flow position for your business and, therefore, will be able to make educated decisions to improve cash flow performance.

Active management

Business owners and decision makers have numerous strategies they can utilise as part of a proactive approach to cash flow management. They include managing the cash conversion cycle, review of supplier payment policies and using available funding facilities. 

The cash conversion cycle refers to the time taken from converting a sale to collecting the cash from that sale. There are about four broad stages of this cycle, and below we have identified a number of actions you can implement to manage the cycle:

Converting Sales

  • Have you done a credit check on prospective clients? 
  • Consider creating a watch list and authorisation framework for customers who regularly drag out payments.
  • Ensure your terms and conditions are up to date and are made available to customers.
  • Streamline the process of recording sales in your enterprise management system.
  • Ensure customer details are accurately recorded.

Delivery of Product/Service

  • Do not wait until the end of the month, send the invoice with the delivery of the product/service.

Invoicing Sales

  • Follow up the invoice with a telephone call, ensure they have received the invoice, pre-empt any questions or objections about the product/service provided.
  • Make sure all sales are invoiced by implementing a regular review process.

Debtor Collections

  • Ensure monthly statements are sent and followed up with a telephone call for any outstanding amounts.
  • Offer multiple methods of payment to ensure the process of being paid is as easy as possible for your customers.
  • Consider offering discounts for early payment of debts.
  • Regularly review the age of outstanding debtors and follow up with a phone call.

The above actions may be effective in improving your cash collection cycle, but they must be used in conjunction with clearly defined responsibilities for your staff, and be monitored by your reporting systems to ensure they have the desired impact on the cash flow cycle.

Should you take advantage of discounts offered by your suppliers? Here is a formula to help you decide whether it is worthwhile, if the formula results in a value that is greater than your cost of capital, then it may be worthwhile paying early. 

Delaying payment may be considered, but if you do go down this path ensure you maintain open communication with your suppliers, otherwise you run the risk of damaging important relationships. 

Review of expenses and cutting superfluous spending is an obvious way to reduce cash outflows. The profit and loss should regularly be reviewed for unnecessary spending. When undertaking this sort of analysis, it is worthwhile to consider the intangible benefits of some expenses on team bonding and motivation.

In the good times, it is worthwhile to accumulate cash reserves which can support the business during a downturn or be used to take advantage of growth opportunities as they present themselves.

Conclusion

To sum up, get visibility of your cash flow position, identify what steps you can take to improve your cash flow, implement, and monitor their impact, changing course as necessary. We have prepared a cash flow modelling tool to help you gain visibility of your cash flow position.

Should you have any queries in relation to how we can help you manage your cash flow cycle, please do not hesitate to contact Chris Grelis on (03) 9069 7700 or 0431 450 384 or via email chris.grelis@dobbyncarafa.com.au