Cash Flow is King, not CASH
Updated: 7 days ago
Running a business, it’s common to focus mostly on your profit but it’s very easy to forget that operating with a positive cash flow can be just as important. There are lots of organisations which can be profitable and not ever have adequate cash flow. In a worst case scenario, insufficient cash flow in a business over the long term leads it to bankruptcy.
In a manufacturing company we can look at an example of an automotive company making car parts and selling them at profit. There’s a long supply chain and the wholesale customers you work with can take months to pay in invoices. But the suppliers you work with to make parts often need to be paid upon receipt or certainly in a couple of weeks.
Even if you have the best product that is increasing in sales, you’re still in trouble if you’re caught between a supplier that need you to pay and buyers that are slow to pay. [most buyers are]
So although you’re a profitable company, this type of situation means you can’t pay suppliers on time or meet possibly your payroll and operational expenses. You’ve got yourself into a cash flow crisis.
On the other hand, your sales could grow with money coming in but it doesn’t necessarily mean you’re making a profit especially when you’re spending too much elsewhere. People everyday borrow money to try and solve cash flow problems but beware,! the rising debt costs can raise costs above what you’re making. and, eventually cash flow dries up and the business fails.
Large businesses and their finance departments should be constantly looking at solutions and ways to improve cash flow.
We have listed a few ways to fix cash flow problems for your business – see which could apply to your company in the future.
Please remember if you’d like to talk to us about your cash flow needs we’re on hand and happy to help.
1. Increase your prices
It doesn’t matter if your a small business one man band it a larger company, you always need to tread carefully when raising prices it’s always a balance between increasing prices and doing it in a way which doesn’t lose customer or reduce monthly income .
It’s very common however for a lot of SME [small to medium enterprises] to be selling themselves cheap to the market and value they provide. There is no handbook for answers here’s and if your unsure we are hear to help and advise. This may not be for you. But you can always try to avoid scaring your customer base whilst looking at ways you can show more value from your product or service.
2. Reduce the burning payroll
Payroll is a massive expense for a business and the tough reality is that when income falls below a certain point, cutting personnel will be the main way that outgoing cash flow can be fixed and it’s fast. If your business does make this choice it needs to first work out what and who to cut, when to cut and how to minimise the damage short and in the long run.
It’s also worth pointing out that making staff redundant can be extremely difficult for any organisation but, although traumatic, emotion needs to be taken out of the equation – the decisions about who goes and who doesn’t go should be based on capability and value to the business, rather than who is senior and who particularly needs the job most.
Please know there are other more simplified ways you can cut payroll costs, such as shortening the working week, cutting salaries, turning full-time workers into part timers, enacting leave of absences and cropping a bonus scheme.
These are all detrimental to the kept staff moral and it’s well
known that cuts of any kind is one of the biggest challenges for a business leader – you firstly need to face up to your employees, be honest, real and appeal to their sense of reason. Redundancies are a way of life in business. moving forward afterwards and growing the business again.
3. Get shot of excess stock
If you are a manufacturer or sales and you have excess inventory or stick in items produced or purchased and you just haven’t been able to sell, then you effectively have dead money sitting around that can be a huge drain on profits and cash flow if you can’t sell it.
The best-case scenario is to avoid this situation in the first case by having a system for aged and unpopular items. Certainly today with the right technology you can properly forecast sales to avoid purchasing too much.
When moving on these items and stock it’s unfortunate because it’s unlikely you’ll be able to recover all your costs however you can mitigate the damage from additional storage and carrying costs, as a decline in value as inventory ages.
You should always have best practice and find ways to reduce your inventory – for example, your supplier might be able to give you a refund or money back at a reasonable discount. If your inventory comes in the form of raw materials, you can use it in other lines or other plants. You might even want to work with competitors by sharing purchased stock or supplies.
4.Talk with suppliers
When these times come and your business in a weak position with suppliers, this can negatively affect cash flow, which In turn mean you need to be super proactive to this and look at ways to offer value to them. and get lowered ‘buy in’ price. One of the ways this can be done is by offering a way to reach new markets.
If you’re part of a food and drink company facing a supplier price increase, you could offer opportunities to enter and be successful in new developing markets that a supplier might not be able to get traction in.
Another way you could get price concessions from a supplier is by reducing price risk. For example, if you’re a food based business and facing a price rise from a particular supplier, you can persuade them to keep prices lower by entering a long-term contract, which from their side of things will appear safer bet than dealing with short-term economic fluctuations.
If you can’t find ways of offering more value to a supplier, think about making financial changes in the way you buy – by consolidating purchase orders [buying more when you can] all in all its a great thing to keep a good verbal relationship with all your suppliers because relationships can help massively when hard times come.
5.Delay any capital spending
Firstly there are great reasons for a healthy businesses to have a high capital expenditure, particularly in industries that require significant investment in areas such as innovation for future growth.
However, capital budgets can swallow a large amount of cash flow and sometimes tough choices need to be made around cutting the money spent on acquiring or maintaining used assets. It’s here where financial departments or a basic business owner will need to have a good knowledge of their own companies capital requirements of future planned projects, and it’s balance sheet, cash flow struggles.
You might need to do a thorough cost-benefit analysis first to justify the expenditure, comparing the costs involved or saved to potential benefits and risk in putting off the spend.
In wholesale and distribution set up for example, although it may help cash flow to cut the spending in the need to improve the effectiveness of a warehouse, it may cost a company long term if it doesn’t increase storage and access to supplies and stock.
Tread carefully please.
6.Chase your low hanging fruit.
We have talked before about how to identify what exactly Low Hanging Fruit are.. These being the possible clients that have almost signed up or decided to just about do business with you... If you can write a list without thinking of a few of these customers/clients maybe you need to be closing these sales and getting payment in.... Like any job, it's easy to miss stuff and when working for yourself it's even more common. So take a break and think about the people you've spoken to recently and how fast you can bring a result in.
7.Boost Sales With Attractive Incentives.
When the going gets rough, you must find ways to quickly boost sales, start aggressive facebook strategies, hosting an event, offering referral incentives to past clients, all of these work and can be done on a shoe string budget. It's best to seek advice or help on marketing the correct offers. As business owners we all know the best things that earn, however it's a fine art to get the right marketing message across and have the sales-copy written in a way that converts.
Steadfast Accountancy and Business Help
32 Pinewood Close