7 Essential drivers to manage your cashflow
Never before has cash been more important to business and all companies are facing similar challenges right now: supply chain, inflation, and the ability to attract and retain people. For any business, supply chain and inflation issues mean that your cash flow is getting tighter, your margins are dropping and your inventory is probably going up. If you are an importer, you’ve got to pay the suppliers quicker and your wage bill is also most likely increasing. Never before has it been more important as the CEO or MD of your business to ensure that people in your company understand the importance of cashflow and how they can do their part in their role to improve it. It's important to also note the importance of cash flow, not just profit!
We have all heard the saying, revenue is vanity, profit is sanity and cash is king. Never before has it been more important in running your business that you understand that. Yes, you are profitable, but your balance sheet is being impacted from various factors right now, and this means you need to understand the key drivers you have at hand to improve your financial position.
There are only seven leavers that any company can play with. Four profit levears; price, volume, cost of goods and overheads. And three balance sheet leavers; collecting cash faster, managing your inventory as well as you can or invoicing the work you do more frequently and finally, negotiating terms from your suppliers.
These are the only seven inputs into cash. Every person in a company needs to understand how they can impact these seven drivers.
How do I manage my cashflow?
7 Drivers to manage your cashflow:
- Cost of goods
- Collecting cash faster
- Managing your inventory or invoicing the work you do more frequently
- Negotiating terms with your suppliers
For anyone running a business, the first thing I would encourage you to do is educate your management team on the numbers that impact these seven drivers. They belong to everyone on your management team, and it's important to not focus on reporting and complicated ratios, but to understand these drivers in simplistics terms and focus on how to improve these numbers. In the most simple terms, cashflow reporting is the movement of all your bank accounts, and understanding how you can impact this movement in a positive direction is the key.
You can do this through simple dashboarding, setting targets to improve these numbers and ensuring everyone understands their role to improve these numbers. This can start as simply as looking for those 1% or 1 day balance sheet improvements: how do we improve our price by 1%? How do we improve margin across our products and services by 1%? How can we reduce our debtor days by 1 day then 2 days, etc?
So for example, if I am a sales person, I need to know what’s the relationship of price to volume. Is it better for me to sell more at a discount or to put prices up and maybe sell slightly less. These are the tools I have to play with, but I need to understand the impact of these decisions. Also, if I’m a salesperson and I am making sales, should I be educating the clients about our payment terms? The easy answer is yes of course, but how many companies ensure their sales team do this?
Working in operations, you can impact the margin of the company. You also impact the inventory or, in a service company, how frequently you invoice the work you do. Everyone in your company has an impact on the numbers and by being educated on this, the whole management team can start understanding how they can improve the 7 drivers of cash they touch and collectively make significant improvements.
To summarise, improving cash flow is a team effort. You don’t need to look for big drastic changes; start with those small incremental improvements of 1% profit improvement or 1 day for balance sheet and ensure the whole team is onboard and understand their part in playing the cashflow game. We call this the Power of One!
Found this article interesting? Listen to our podcast and hear how Rob Boll and Evoke Managements' part-time Directors Robert Green & Keith Donoghue help our clients improve their cashflow management.