Top Tips to Cash Flow
These are tough times for many businesses. Rapid inflation and so rising input costs. Rising interest rates leading to increased financial costs. Squeezed consumers buying less and making it difficult to pass on increased costs by increasing prices. Add to this, recession, and global supply chain issues, and for many it is the perfect storm conspiring to undermine business.
None of these things are new, but it is unusual for them all to come along so strongly at the same time. Cash flow should always be the number one priority for any business because unless you are able to meet bills as and when they fall due then no business can survive very long. Turnover and even profitability are good in the longer term but it is lack of cash flow that will starve a business leading to its demise. Many mistake cash flow for profits, but cash flow is as much about timing as anything else.
In these difficult times then, top tips to cash flow are perhaps the most important top tips of all.
- Maximise Profit – Whilst cash flow and profit are not the same, clearly the larger your profit margins are then the more cash your business will generate.
- Minimise Costs – This is the other part required to help maximise profit margins and ensure that cash inflows do at least exceed outflows.
- Encourage Quick Payment – Sales cycles are often determined by the industry but wherever possible try to encourage buyers to pay as soon as possible, ie with order or on collection rather than offering any credit terms. If credit terms are the norm, then consider offering a discount for earlier payment as this will often be better for your business.
- Seek Credit Terms – Wherever possible seek to pay for goods and services as late as possible as long as terms do not penalize this unduly. Ideally by getting buyers to pay immediately but your business obtaining 30, 60, or 90 day terms might well mean that you have a positive cash flow as you are using the buyers money to pay for the product you are selling them. But be warned, obtaining credit as an early-stage business can be difficult.
- Expansion – Take extra care when scaling a business as this places extra stress on cash flow as any expanding business consumes cash more quickly that one that is trading on a level basis. Ask yourself how long does an investment in new staff or premises take to feed through to extra sales and cash flow so that they pay for themselves and generate more cash?
- Supply Chain – In recent times supply chains have been disrupted for a number of reasons, but utilise ‘just in time’ supplies where it is prudent to do so as this reduces the need to carry stock.
- Manage Stock – Ensure that stock is regularly turned over and you are not holding old or dead stock. If this is the case, then reduce prices on those items and sell them in order to turn into cash.
- Raise Finance – Obtaining debt or credit financing can be difficult for early-stage businesses but consider raising equity finance in order to ensure that you have a long enough runway to expand the business and to trade through these difficult times. This will only apply if your business is sound and attractive to external investors.
- Delay Expansion – In difficult times consider delaying expansion in order to postpone the extra outlay of cash until times are better.
- Reduce Size – In extremely difficult times it might be necessary to reduce size as this will reduce costs and free up cash outlay and might even generate cash by the sale of assets.
Not all of these top tips to cash flow will be relevant for every business, or even possible, but by using the ones that are they can certainly help to put you and your business in a better position to stand up to the challenges of running an early-stage business.