How Do You Improve Your Cashflow?
Remember that a profit isn’t real until payment has been made.
A common mistake made by business owners is to concentrate solely on turnover as per monthly sales reports, graphs etc.
The more astute will have monthly Management Accounts that will show
- Gross Profit & Profit before tax,
- For the month & YTD, often compared to last month and last year, but it’s not the whole story
How many understand a Balance Sheet let alone:
- Inventory Days
- Days Outstanding Sales & Days Outstanding Purchases
What are the metrics, how are they calculated and is it good that the number is getting larger or smaller each month?
Most owners will know and be able to tell you who are their 5 biggest customers ranked by sales, but which ones are the ‘best’ defined by gross margin and speed of invoice payment?
It’s a simple equation that by selling more to a company that pays you slower than you pay your suppliers and your staff can actually decrease your cashflow. If that’s the case with your bigger customers, it’s probably time to consider the carrot & the stick approach.
Carrot: Incentives to pay quicker i.e. settlement discount
Stick: Employ a credit controller, possibly outsourced, rather than rely on your accounts system automatically sending copy invoices and reminders
Most owners realise that stock sat on shelves unsold is like taking cash out of the bank, but how can you decrease the value of stock held without hurting sales? Have you considered:
- Smaller more frequent orders
- Supplier despatches to delivery hubs
- Clearance sales
The most important things to consider
- Are you aware of the reconciliation of Profit to Cash? (See graphic below)
- How do you measure the important metrics?
- How quickly can you identify an adverse trend?
- What tools can you use to correct it?
Remember: You’ve got to be proactive, cashflows rarely correct themselves!