14 Practical steps to improve Cash Flow

Cash is King

A positive cash flow keeps the heart of any business pumping, but a negative cash flow will eventually cause the business to fail.

A growing business may appear to be successful, but it absorbs cash like a sponge and may actually be a house of cards with no future.

Once the business owner identifies a negative cash flow trend, practical steps should immediately be taken to improve the cash available in the business.

This article will assist you in turning your business’s cash flow positive again.

1.  Monitor cash flow

An entrepreneur should know exactly what is happening in his/her business, cash-wise.

Cash flow should be monitored regularly – at least weekly, but ideally every day.

All accounting packages produce cash flow statements, which are necessary to manage cash flow. You must study and understand these statements.

Bank statements can be very useful: is there more or less cash in the bank on a certain date than on the same day in the previous month? For this purpose it is better to use a date such as the 15^th instead of month-end, when there are typically more cash flows which can produce erratic results.

Consider the effect of weekends and public holidays, when payments are typically delayed until the next business day. Nobody ever pays early (and you shouldn’t either).

2.  Accounting and administration

Accurate accounting and administration as well as regular management reports are essential for the success of any business. Without these functions, it is impossible to manage cash flows and avoid nasty surprises.

They are also useful in determining trends in your business – are sales, expenses, finance costs, bad debts and trading stock going up or down? What will the effect of this trend be on your business and your cash flow in particular?

3.  Anticipate future cash outflows

Potential once-off costs as well as regular future expenses (such as repairs and maintenance) should be quantified and you must have enough cash available to cover them – also for unforeseen cash outflows.

This area of cash flow management is often neglected by entrepreneurs who optimistically believe that nothing will go wrong. Murphy’s Law states that it will.

Work towards having an unused finance facility (e.g. bank overdraft or access bond) available to cover unforeseen expenses when necessary.

4.  Slow down capital expenditure

Normally investments in new capital assets (equipment, machinery, plant and property) do not produce positive cash flow for a while.

Sometimes it is better to keep older machines and equipment going for a little while longer.

A business which is cash-strapped should delay capital expenditure as far as reasonably possible, unless it is crucial for its immediate and longer-term survival.

5.  Reduce trading stock

Many SMEs carry too much slow-moving and expensive trading stock. The key is to hold the minimum stock items required to run the business effectively.

Keep smaller items which move quickly in stock, but reduce the number of more expensive stock items, especially those which customers don’t ask for every day. In some cases you may keep only one or two items in stock and re-order as soon as one is sold.

Get rid of stock items which don’t sell, if necessary even at a discount – this will free up some of the dead cash invested in stock.

6.  Pay creditors later

All participants in any supply chain have more or less the same cash flow goal: pay creditors later and collect earlier from debtors.

The larger participants in the supply chain usually win, which means that they are effectively using the working capital of the smaller participants in their own businesses.

Conversely, the smaller participants usually have very little bargaining power and often end up subsidising the cash flows of their larger clients and suppliers.

The only way to pay creditors later is to lift your game and fight in a higher weight category, i.e. find some reason why your creditors should accept later payment from you and then convince them that it is a good idea.

If other suppliers of similar goods or services offer better terms than your own suppliers, you may either move over to them or use their offers in negotiations with your own suppliers.

7.  Speed up debt collection

Offering credit to customers is a great way to attract more customers and increase sales. However the cash invested in debtors should be balanced by enough working capital, creditors and fast-moving stock.

Sales must be converted to cash as quickly as possible. Invoice customers immediately on delivery of the product or service.

Debtors should be reminded timeously about upcoming payments, so that they cannot use the “Sorry, I forgot” excuse.

They may be encouraged to pay sooner by offering cash settlement discounts (e.g. 3% off for COD). They could also be asked to make same-day EFT payments – this comes at a relatively small cost.

Some large corporates are notorious for paying their suppliers as late as possible. Suppliers should ensure that they understand their corporate clients’ creditor payment systems, especially the rules around cut-off dates and documentary requirements for payment approvals. Deadlines should never be missed.

Slow-paying debtors should be chased for payment, even if the amounts are large and you are very reliant on sales to those debtors. Explain that you are a growing business and need prompt payment to survive.

Rather walk away from a client who regularly pays late and cherish those who pay on time, every month.

8.  Take deposits

Some industries have developed a culture of taking deposits from clients before any work starts. Typically this is to provide funds for items which need to be ordered and bought in advance.

Consider whether you can insist on deposits in your particular industry.

9.  Reduce bad debts

Bad debts written off mean that the business has lost cash.

Entrepreneurs are often so eager to grow sales that they extend credit to all and sundry, without a proper credit assessment process.

They forget that each sale means that trading stock has moved out the door. This is a loss to the business, unless it is quickly made good by a cash payment from the customer.

Customers applying for credit should submit a proper credit application and their references should be checked. This obviously becomes more important if the credit requested is large.

Credit reports are available from several credit bureaus at a small cost relative to the credit risk. Entrepreneurs should not only request the reports, but also ensure that their employees receive proper training in the interpretation of the reports.

10.  Take out credit insurance

Credit insurance is not cheap, but should be considered because it can mean the difference between swimming and sinking.

The mere threat of a bad credit report can also sometimes motivate the most difficult customer to speed up payment.

11.  Increase sales, but only to paying customers

Driving sales at all costs and selling on credit to anybody is a sure way to go under – quickly. There must be a balance between marketing, sales and extending credit.

Many new businesses protect their cash by spending too little on marketing. Marketing drives sales and sales drive profits. Increased marketing spend is sometimes the only way to increase sales and profits.

“Brand building” in the form of advertising, sponsorships etc should not be undertaken by small businesses struggling with cash flow. Marketing expenses should be designed to directly increase sales, with immediate cash-flow results.

Improving sales is the most obvious way to improve the business’s cash position. Cash sales are great, but credit sales should only be made to creditworthy customers who will pay their bills.

12.  Short-term funding

Typically, bank funding is the cheapest way of resolving temporary cash flow problems. However, banks are not keen to provide facilities to smaller businesses without tangible security or a long trading history. Their decision-making processes also tend to be longer.

A variety of specialised financiers offer several cash flow solutions to smaller businesses which cannot get bank funding. These financiers typically look at current debtors, fixed assets and in some cases even future sales as security for short term funding.

13.  Get rid of unproductive personnel

Employees should understand that they need to earn money for the business so that the business can pay their salaries and bonuses.

Unproductive personnel can be a huge cash drain on any business. A growing small business often appoints new personnel before they can be put to good use. This should be avoided like the plague. Appoint new staff only when the current employees are working overtime all the time.

Be aware of the legal processes regarding retrenchments and follow the letter of the law diligently – otherwise you may spend many unproductive hours at the CCMA or in court defending your actions which will ultimately cause a cash drain rather than improved cash flow.

14.  Do it now!

Following these steps and strategies may save many businesses from disaster. The key is to act quickly and decisively as soon as a negative cash flow trend is detected.