The finances of your business are the pulse, the beating heart that keeps the entire organisation alive. So it’s vital to do regular checks on your cash flow to see if there’s any way of improving it and areas where you can reduce your outgoing expenses.
Cash flow is like a running river that ebbs and flows. It will be different every six months or year, even if it is positive cash flow.
And, just as markets aren’t stagnant, neither is capital. If you lose control of your cashflow it’s can be like a dizzying kayaking ride down a thunderous mountain river with your business heading for the rocks.
However you can predict your business’s cash flow.
In fact, it’s vital that you do. For your business’s survival you should be able to predict what your cash flow will be week to week, or quarter to quarter or year to year.
Your cash flow is affected by such things as:
Here’s our handy cash flow health check.
Efficient business management: It’s important to check how well you’re managing your business’s stock or services.
For instance, how quickly are you replacing your stock? Do you keep thorough tabs on the movement of your products and the peak cycles when they are purchased?
If it’s a service you’re providing, this is where you can check on whether the demand has always been historically met.
Focus on the easy fixes you can do that make substantial differences to your business. For instance if you re-negotiate your phone contract from 100 to 50 a month (this will get you a massive 50% savings). Obviously any saving is great but will it really make that huge a difference? . However if you can sublet part of your office for 1,000 per month that will make a significant difference.
I know where I would be focusing my energies.
Or perhaps there’s an area in your business where you can automate – for example purchase ordering or even customer inquiries, that saves time and money.
Have you lost valuable clients through not sub contracting out a service at a pivotal, high demand time? In other words, do a rigorous review of the history of your products or services supplied and then see where there are shortfalls. Keeping accurate records of demand and supply to provide crucial snapshots of your customer’s needs is highly important.
Liquidity: This goes to the soul of your business’s cash flow. It’s a simple check of your ability to raise positive cash when needed. So how easy is it to pay off your bills? Does your business have enough assets or cash on hand to quickly settle debts and pay suppliers? This is a good measure of your financial strength.
If your business has a lot of cash tied up in assets that aren’t easy to access, you could be in trouble if you are suddenly hit with unexpected liabilities. If the bulk of your assets are stock then how are you judging stock levels? And what sort of stock is it?
If your assets are fixed assets such as machinery then consider: are you better off borrowing against them to provide working capital?
One acid test is to imagine that you have no income at all coming in for the next month. Could your business then pay off all its current debts, ongoing expenses and any interest on loans? Could you still stay afloat? This helps determine your margin of safety.
Incomings versus Outgoings: This is one of the key tests of any business’s cash flow. It’s the turnaround time from when you supply goods or services to a customer/ client to when it is paid. Constant delays in collecting cash will really hurt your business’s financial health. Equally, if you’re having trouble paying your suppliers and are pushing things to the limit, this affects your reputation.
Look for favourable terms
Two things you can change that have instant impact on your cash flow are the trading terms with both your customers and suppliers.
For instance, if you give your customers a 30 day period to pay their debt to you that is a generous condition that could severely hurt your ability to pay off your own debts and have working capital. You may want to consider a shorter payment term. Or require an upfront deposit. Every day that you don’t have a customer’s money in your account is a day that limits your ability to invest or pay off other debts. Therefore getting paid 7 days earlier than normal can make a massive difference. Of course the worse case scenario is when you spend money that’s yet to arrive – and then it doesn’t. So re-negotiating trading terms with your customers should be about making sure of your security.
And it’s not just your customers or debtors. You should look at renegotiating the terms with your suppliers. For instance, if you’re locked into a lengthy contract with a phone or IT supplier. This is great for the supplier, but meanwhile you’re missing out on competitive deals elsewhere. Or what if the IT system you’re using has been made antiquated due to technological advances? But yet you’re stuck in an unwieldy contract that you have to buy your way out of.
As a business that pays, you have more power than you may realise. The suppliers ultimately don’t want to lose you. So this is your initial way of bargaining and re-negotiating your trading terms.
ATB has tools that help you measure how changing the terms of your trade will impact on your business. These tools give you an instant snapshot of how your business’s cash flow can be affected by gaining more favourable trading terms.
Hunt for savings everywhere
Do an audit of all your operations and all associated costs. Are there areas where you can save? Typically this may be in fuel costs, phone costs, utilities or office hire. It’s probably worth revisiting any packages you have for internet, data and phone.
These are all highly competitive features and whatever deal you had a year ago may well be bettered.
Indeed see if you can negotiate a better deal from any of your current providers. You may find that there are inventory items which have not been turned over for a long time. In which case, consider discounting so as to sell them off and dropping them completely.
You can also look into outsourcing wherever possible. This can extend to bookkeeping and accounts. It may be using more automated systems for things like purchase ordering or administration.
Be ruthless and focus on what is bringing in valuable dollars and what is essential to your business. Everything else can probably be outsourced.
As a small business owner ask yourself: am I wasting time caught up in the paper storm of administration when I should be out selling, bringing in leads or coaching my sales team? Or if you have a factory look for ways of reducing the receipt off order to delivery time. Bringing down the lead time will ramp up your business efficiency.
Identify weak points in your operations
Audit your operations and processes. If we remember that unwieldy processes eat up valuable time, this translates into extra costs and slows down your ability to generate revenue.
Apart from streamlining your operations look at whether some of your staff could be outsourced. There are more associated costs with full time employees, so consider whether some roles can be part time or casual.
Hunt for savings everywhere
It’s easy to coast for years on the same technology and internal systems. Yet you could be silently hurting from an outdated computer set up that sets you back and costs you money, time and valuable resources. For instance, your team may have to do far more data entry than is actually needed if a more sophisticated system was used.
One clear sign is if your digital platforms have trouble talking to each other. If your cloud based platform has issues with connecting to your office network or mobile network.
Another sign is if you’re spending hours struggling with IT solutions to fundamentally simple processes, like sharing data amongst a group of employees. There’s often a fear with SMEs that tech change is costly and disruptive. Yes, of course it is. This is why many businesses hold off on change. Yet this is to their detriment. It may be that your business needs a severe foundational IT change.
But then all subsequent iterations will be building on that system. As we move into more sophisticated cloud based systems, the physical changes and upgrades become less intrusive. Cloud based systems also level the playing field and allow small to medium businesses to compete with much larger companies through having a global reach.
So if you have a legacy computer system, now is the time to upgrade.
How many of your assets (for example a shop front or retail space) are funded by debt? And what is the percentage of your funding of assets to liabilities? If you’re pouring much needed capital into an underperforming arm of your business then you should think about dropping it completely. Ok its true, that some assets can be a liability for a long period before breaking through. But if you have so-called assets that are sapping your capital with little to no return then it’s time to do a cull.
ATB specialises in working with all businesses to bolster their strengths and identify any weaknesses.
Working with small business is our passion and our philosophy. We’ll help create meaningful business goals and long term plans.
We will: create a financial blue print for your business’s future; review your growth and operating plans; identify leakage and help prevent debt from spiraling.
It’s all part of our successful 5 step process:
1) Find out what’s important to you and your business
2) Prioritise your business goals so they’re achievable
3) Develop a strategy to achieve those goals
4) Implement the plan
5) Measure the results
Download our free ebook to learn more.
“Never take your eyes off the cash flow, because it’s the life blood of the business.” – Richard Branson