5 ways to improve cash flow

blog Oct 25, 2022

Growing a small business has many challenges, with cash flow management being one of them.

With interest rates rising, cost of living increasing and then throw in economic uncertainty, managing your cash flow is now more important than ever before.

I have seen many profitable businesses go under because they didn't manage cash flow.

Understand your funding options which can help cash flow.

What are some of the funding options to grow your small business

Please don't let this be you!

Following are 5 ways to help you:

  1. Forecast your cash flow monthly for the next 12 months
    • Use a spreadsheet - it does not have to be complex
    • Estimate your income with assumptions or formulas  - not just numbers with a % increase on last year
    • Estimate your expenses based on your current cost structure - this should be the easiest bit
    • Once prepared for 12 months, break it down to quarterly and update this every month (forecasting three months is easier and should be more accurate)
    • If you have any negative months, review and if no changes, you should seek external advice - the alarm bells are ringing!!

  2.  Review income and opportunities to increase
    • Is your business and financial model sustainable?
    • Are you crystal clear about your target market and your competitive advantage?
    • Can you introduce new products and / or services with good profit margins?
    • Are you getting an appropriate return on investments?

  3.  Review your expenses for appropriate value
    • Review each expense you have and ask the question “Am I getting value” and if not, look at alternatives
    • Not necessarily about reducing costs, but about ‘value’ as cutting costs for the sake of it has its risks (eg. Marketing)
    • Talk with your suppliers about how you can reduce their invoices (particularly if you have cost of goods). Pay invoices sooner than payment terms to receive a discount

  4. Review or introduce credit terms and payment policy for your debtors
    • You must have a signed credit agreement with your customers
    • It’s important to have a system for collecting payments
    • Do you have debtors outside of credit terms? Why should your customers not pay in the timeline agreed?
    • Introduce an automated system to communicate with your customers from when the invoice is provided, shortly before payment is due, one day after the agreed payment date, seven days after, fourteen days after etc
    • At some point, if they go beyond the due date, engage a collection agency or lawyer to collect

  5. Inventory turnover
    • Inventory includes all goods, raw or finished, that a company has in stock with the intent to sell
    • Excess inventory can significantly impact your cash flow, if not managed and funded appropriately
    • Use some metrics such as stockturn which is the number of times per annum your inventory has been replaced: Cost of Goods sold/  stock on hand (average)
    • A good inventory turnover ratio is between 5 and 10 for most industries, which indicates that you sell and restock your inventory every 1-2 months. This ratio strikes a good balance between having enough inventory on hand, and cash flow
    • High-volume, low-margin industries tend to have high inventory turnovers. Conversely, low-volume, high-margin industries tend to have much lower inventory turnover ratios

Ways to Improve Inventory Turnover

  1. Proper forecasting
  2. Automation
  3. Effective marketing
  4. Encourage sale of old stock
  5. Efficient restocking
  6. Smart pricing strategy
  7. Negotiate price rates regularly
  8. Encourage your customers to pre-order

Register for our ‘Business Growth Formula’ course now as this will help get you focused on the above five. There is …limited numbers for each cohort, so don’t delay