Improving the cash flows in your business sounds harder than it really is.
Once you implement some of the tips below but still find it hard to improve cashflows, it maybe that your business itself is in trouble and needs major structural change.
1. Implement Key Performance Indicators (KPIs)
You should have key performance indicators set up in your business on daily, weekly and monthly lists, which will give you advance warning of impending cash flow issues. The key ones to set up are:
- Cash cover – how much cash in hand you have to cover your liabilities at any time, which is current liabilities divided by cash
- Working capital – your net current assets, i.e. debtors ,stocks and cash less current liabilities, should be positive
- Sales and profitability – make sure you know what your sales and profits are on a daily basis and if this starts to reduce over time, you will start to have cashflow issues. Sometimes profits are hard to calculate on a daily basis but can be estimated as a percentage of sales. You should also estimate profitability by customer so that if your sales to a low profit customer starts to outstrip all other revenues, overall profits will start to reduce.
Of course, these figures will only be as good as your management of the business ranging from timely billing of customers, collecting debts, managing your suppliers and maintaining up to date accounting records.
2. Make sure your accounting records are up to date and produce regular cashflow forecasts
Many businesses both small and large don’t keep up to date accounts and by that I mean accounts are usually a month behind. All transactions should be entered daily, so that you can keep track of sales and profitability and also your bank account. If your accounts are handled by accountants off site, have a reporting system that gives you daily updates and with cloud accounting systems that is quite easy today.
Once you have up to date accounts, get your accountant to produce regular cash flow forecasts. This should be the key document used to manage your cashflows.
3. Get your pricing right
A lot of businesses can end up with differential pricing for customers and knowing the overall profitability of the business but also each customer’s profitability is important.
Over time, overheads start to creep up and pricing tends to remain below what it should be to maintain profit margins. You should compare your profit margins with the competition and if your’s is lower, then you have to put it right, usually by increasing your pricing. If some customers don’t like that, then maybe it’s time to let them go elsewhere!
If your pricing cannot be adjusted to give reasonable profit margins for the business, the key question to ask yourself is why you’re in that business at all. There are lots of ‘zombie’ businesses out there which are barely surviving and any increase in costs such as interest on loans would tip them over the edge into cashflow problems and eventual bankruptcy.
Make sure yours isn’t one of these.