IMPROVING CASH FLOW!

Working with small to medium sized businesses in my network for many years, I heard this common question most of the time from the managers who are involved in day to day management contributing organizations achieving their goals in their respective line of businesses, about how to improve the cash flow. This isn’t surprising to me as I have experienced it first-hand working in the industry.

Cash flow management from the perspective of companies with high cash balances and high liquidity is way different and therefore the management style and strategy crafting would be different when compared to managing cash flow for small and medium sized businesses where it works like a backbone (with generic similarities).

It has been observed time and again that many small and medium sized businesses (including start-ups) fail because they lost the ability to pay their bills “on time” which ultimately leads to shut down. This “on time” cash management is the key for these small & medium sized businesses to be competitive in the industry they operate in……yes a good cash flow management can provide companies with competitive advantage!

The depth of the topic is very deep and can be influenced by numerous factors including but not limited to type of business, impact of foreign exchange, industry benchmark, cash burn vs cash build rate, inventory requirements, purchase lead time, manufacturing cycle, relationship with the vendors, currency difference in sales and purchase transactions, debt consideration, credit policies, comparative cost of money and fixed periodic commitments to name a few.

Every business situation demands a different and particular strategy and requires in depth analysis & review before employing any strategy, here are some tips which can help improving the cash flow of a business;

1) PLAN!!! Prepare, measure, compare & frequently update forecast:

Managers must plan the cash flow. Just like other written policies and procedures, managers should carefully write the cash flow plan including what-if scenarios. A simple forecast is a concept of past, due to highly dynamic business environment the cash flow forecast must be updated on an ongoing basis in order to transform it into a competitive advantage over other similar companies. Yearly, semi-annually, and monthly cash flow forecasts are good starting point to arrive at a baseline, however for small to medium sized businesses, a weekly forecast with constant update (to reflect changes based on business requirements) could yield excellent results in improving the overall cash flow.

 2) Make it easy for your customers to pay:

You will not be paid early if you do not make it easy for your customer to pay you. Simply, the more time or steps it involves to complete a payment transaction the more payment delays you will observe. Accept debit, credit, paypal, visa, master, american express, cheques, cash and use any other payment platform to make it easier for the customers to make a payment which involves fewer steps and minimal time - help your customer to reduce the “cost” of making a payment.

3) The “payment vs receipt terms”:

Running a business with shorter average vendor payment terms compared to longer terms for customer receipts is a perfect recipe for disaster. The first thing to do in this scenario is to stop this “terms deficit”. Well, there could be various factors one should look at, however the ultimate goal is simply to get paid early and to stretch the payment terms as much as possible. “How” is a matter of subjectivity and there are many methods managers can use and it could be achieved by deploying various tactical strategies for e.g. differentiate the product from the competition, delivering the best quality, marketing the product using ROI based approach, or simply offer an early payment discounts. The idea is to do something that your customers feel good when paying you early when comparing you with their other vendors.

Examples of obtaining longer payment terms from the vendors include building up credibility, making sure to pay by the agreed upon terms….yes “without delays”, showing the vendor that payment is a decisive factors of your vendor approval process (provided a competitive industry), without compromising on the quality of the product – work with the vendors who wants to grow in the industry etc. The more a vendor is working to penetrate in the industry the more flexibility it might offer to its customers in order to increase its sales.

If your product can outcompete the competition, use a “partial payment in advance” term to sell to the customers. This might not be fit for all the products offered by your business but you can always use it for the segment of products which has such competitive advantage over competitors.

 4) Purchase commitments:

This is another very important area to analyze and to make sure that it is well synced with your sales in the funnel with a greater degree of certainty….yes with a greater degree of certainty. Often small- medium sized businesses are at the mercy of their vendor with more negotiation powers due to their size and influence in the industry. Real challenge is when vendors require companies to place the orders months in advance to streamline their supply chain and to achieve their yearly sales target with little to no room for changes. A good strategy is to try to shorten this gap with eventual goal of maintaining the optimal inventory balance (only if required).

Another practical aspect noticed is to keep a close control on the inventory receiving and to make sure to count the payment terms when the product has been received (make sure to clearly draft it in the purchase agreement). When negotiating purchase agreement insert clause which allows you to update purchase orders (delivery dates, quantities among other flexibilities) when ordering in advance.

5) Other factors to consider:

Regardless of the industry specific factors, there are some strategies which are generally accepted across multiple industries which can result in overall improvement in the cash flow, following are some of those methods which you can also implement to achieve better cash flows;

a) Get LOC from bank and use it to the minimal (only if required!): Couple other factors like investment yield rate Vs cost of borrowing the money etc. will come into play, however generally, LOC with lower interest rate from the banks is a good way to meet temporary cash requirements.

b) Factor your AR balance: This is a great strategy when you are dealing with customers with good credit rating. However to have this effective and working for your organization, one needs to make sure that the company has a good credit check control/policy in place when accepting new customers. Some key factors which helps to evaluate the credit worthiness of the potential customers include, asking for references, analyzing credit reports (D&B, Equifax etc.), looking at the financial data and historical payment data etc.

c) Reduce overheads! to reduce the cash out flow: This is an ongoing strategy and managers should constantly look into ways to cut the OH whenever they have an opportunity. It is more of an inbuilt overall strategy and should be considered at all times and must need to be filtered down from leaders (on the top) to the managers and employees (who are involved in daily decision making process).

d) Create a reserve: An excellent approach for a good cash flow management is to always work with a buffer. Instead of using the full available limit when considering operational payments commitments, limit it to a level and invest the portion of surplus. Always use a reduced threshold as opening balance and use the cut portion as a reserve account or for other investment purposes.

e) Communicate!!!! the approach to the employees: It is integral for a successful plan that it is well communicated to all the stakeholders involved, especially in an organizational setting a well-crafted strategy can easily be failed just because of poor communication or a lack of understanding among the participants. Similarly, a good cash savvy communication and philosophy is very important so that each employee at his/her own level understands the bigger picture and understands how their portion will fit in an overall winning strategy, beside cash savings this will also result in everyone taking a pride for the overall success and will increase the motivation level as well among the employees.