From Cash Flow Starved to Cash Flow Rich – 5 Key Steps

One of the biggest challenges that I see business owners face is that (on paper) they’re making a profit but they never seem to ever have any money in the Bank.

Although they’re making the sales, there’s an imbalance between the money coming in and the money going out.

Maybe you have heard the term, “Cash flow is King”. It is. Without it, a business simply can’t operate in a sustainable way.

Many businesses gauge the health of their business and make decisions based on their Profit and Loss (P&L) statement. If that business’ cash flow is diabolical, a P&L is pointless. They can’t pay suppliers. Or at worst, taxes and wages.

Here are some key steps to free up cash flow.

1. Do a Cash Flow Forecast

The most transformational things our clients have done from day one is daily cash flow management – predicting their cash flow and bank balance on a daily basis – 90 days out.
It’s amazing what it does for a business.
Cash flow forecasting and planning become especially powerful if you’re planning to grow your business.
For instance, when your sales increase, you’re going to need to bring on new employees and increase your inventory.
That means you’re going to need to shell out money upfront to fund that expansion.
By knowing your cash flow day-by-day you can pinpoint expense blowouts in advance i.e. where several big expenses will all fall due at once.
We look at who you owe money to and I say, “Don’t pay that. Pay this. Make arrangements with that creditor. Delay this. This will get you back in the black.”
One client came to us and he was $300k in the red. Within 30 – 45 days of working together they turned it around and never went under $50k in the Bank.
I can’t stress this strongly enough.
“Daily cash flow forecasting will change your life.”

2. The Accounts Payable Accounts Receivable Balance

Many small businesses that have a cash flow issue find there is imbalance between their customer terms and supplier terms.
For instance, customers pay you in 90 days yet your suppliers want their money in 30 days.
That’s 60 days you need to float which means you need to pour in working capital.
This can be diabolical even suicidal. Ask yourself:
1. What terms are you offering customers and are they paying in time?
2. Is it worthwhile offering a discount for early or on-time payment?
3. Do you need to offer credit terms at all?
4. Is it worthwhile seeing if you can extend payment terms with your suppliers so you can keep money in the Bank longer, or does the benefits of that discount outweigh your goal of shortening the receivables-payables gap?
One of our clients in the automotive industry had a large receivables-payables gap. There were offering clients 7 day payment terms on tyre purchase and fitting yet most were actually paying in 20 days.

The first recommendation I made was to stop offering credit to customers and ask for cash terms. This instantly transformed their cash flow position – so much so that it added $50,000 to their cash flow.

With another client in the construction industry we recommended they pay early which gave them a trade discount so in his situation it added to the profitability of each job.

There isn’t a ‘one size fits all’ approach to managing inflows and outflows. The solution stems from having an intimate understanding of the balance sheet.

In fact, understanding the balance sheet is 5 to 10 times more impactful on cash flow than the profit and loss therefore careful management of receivables, payable and stock is necessary is critical for cash flow management.

The next step is to ensure that the decisions made are implemented and followed through with.

3. Get strict on accounts receivable terms

If you can’t get all your clients to pay cash up-front, consider how you can ensure customers pay on time or even early.
First, identify how long it is really taking you to get paid. Many business owners find that even though their payments terms say 7 days, they’re actually waiting 55 days for their money.
Second – what are you doing to follow up your debtors? What systems do you have in place?
Getting a handle on this will dramatically increase results.
The slacker you are on following up debtors, the greater the chance that you won’t get paid at all. For many customers, once they have the service or the goods, the urgency to pay has gone. And the longer you leave it, the less urgent it becomes.

4. Re-evaluate your stock management

I find the many businesses have as much as six figures or more tied up in inventory sitting there on shelves for months at a time gathering dust.
Instead, re-evaluate your inventory and you’ll instantly free up large sums of cash.
Here are some questions to ask yourself:
• Do you have excessive money tied up in inventory that you only sell occasionally?
• Could you better spend that money on high turnover items that sell more quickly?
• Instead of ordering once a month and holding large volumes of stock, would it work more to your advantage financially, if you made smaller orders more frequently?
When I first evaluated the stock management processes of North Terrace Tyres we found that they had way too much cash flow tied up in stock. We changed their processes which reduced stock levels significantly which preserved his cash flow.
At other times when cash flow was healthy, I’ve made recommendations to take advantage of supplier deals which increased stock holding but also increased profitability.
5. Secure better terms with your suppliers
Often we find that small business owners simply accept the terms that their suppliers ask. They don’t need to.
Many of our clients find that with their strategic suppliers who they buy stock from regularly, they can negotiate better terms and better pricing. In other words, extending payment terms while at the same time getting discounts.
It’s a competitive environment out there and chances are, your suppliers want to keep your business. They’re often willing to bend to do that.
The key is having great negotiation skills. One of the things we do for our clients is to show them how to be better negotiators so they can get better deals and also better payment terms, as well as maintain a strong working relationships from their key suppliers.
This is one of the things we worked on with Bill from North Terrace Tyres.
After making a few changes to what he was doing, his margins lifted by 164% and he experienced a 300% increase in profit.

These kinds of results may be possible for your business too. The key with making any changes in a business or in your personal life for that matter, is to know where you are right now. So – spend some time understanding your cash flow position right now and what it will be in the future.

We provide our clients with a cash flow modelling tool free as part of doing business with us. If you’d like to find out more about how we can help take you from cash flow struggle to cash flow abundance, simply touch base with us.


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