A healthy cashflow is a major contributor to your business’s ability to survive and grow.
Do you want to harness the power of your cashflow to grow your business?
Are you struggling to pay bills when they fall due?
Speeding up cashflow can help with both these goals.
Cashflow Acceleration discusses how you can accelerate your cashflow to improve the health and growth rate of your business.
This is a Yellow Belt article.
Cashflow is the vital “life blood” of any business.
- Determines the businesses longer-term financial viability.
- Has a significant impact on the rate at which the business can grow.
- Is one of the most important aspects of good company management.
Poor cashflow is one of the main reasons businesses fail.
It is not only small businesses that fall victim to this problem.
Big business can also slide into poor cashflow management leading to ruin.
Choice Between Monitoring Cashflow and Profit
Many people confuse cashflow and profit and think they are similar; but they are not.
Cashflow is a far more important measure than profit.
Read more about why that is in the Cashflow Beats Profit article.
The calculated ‘profit’ may not have much reality to the owner/operator down in the trenches.
Cash is either present in your bank account or not. It is an indisputable measure of your businesses ability to survive and thrive.
Being practical business people:
- Leave the calculation of Profit to the accountants.
- Rely on the estimation of Cashflow.
- You will get reassurance that your business can pay its debts as they fall due and has the ability to grow.
How to Eat an Elephant
Speeding up all aspects of your Cashflow Acceleration at once may prove to be too much of a challenge.
Is your business large enough to have several departments?
Each department can work in parallel on the 4 components of Cash Accelerator.
Form teams if input is required from more than one department.
Is your business a small company?
Managers and staff will need to pace themselves over the 4 components.
In either case, set yourselves a quarterly goal to work on in the Cash Accelerator process.
The Cashflow Model spreadsheet (available for download in the Profit Savvy Knowledgebase - coming soon):
- There are various elements that you can change and you can "Model" the results of making these changes.
- As you make a change, you will see the percentage change under the Impact Column (Column F).
- Apply 80/20 thinking (see The Amazing 80/20 article) and work down a list of things that can be done in order of their impact.
Choose a major topic to work on (e.g. price increase):
- List the various ways that you think you can increase price.
- Sort them by their likely impact on the rate of change.
- Apply 80/20 thinking to do those with the largest impact first, where that is feasible.
What improvement are the changes making?
- Considerable improvement - keep going.
- Small improvement - determine if the time and effort involved is worth the change. If not it is time to focus on another area of your business.
Incremental business improvement is known as Kaizen.
Business-wide attention to incrementally improving the areas of your business which will have the greatest return from the application of time, money and other resources.
Read more in the article on Kaizen - Kaizen Leads to Continuous Incremental Improvement.
Not familiar with Kaizen:
Start with small / simple improvements from the following lists. Get some quick successes to build your confidence.
Familiar with Kaizen:
Apply the 80/20 rule via the discoveries you made using the Model spreadsheet mentioned above.
Work on your major contributors first.
Are you getting more successful at ‘eating your elephant'?
- The bottom line is that you see more money in your bank account. A more measurable tool is the Cash Conversion Cycle metric (see the article here).
- It will give you an estimate of your cashflow efficiency at a particular point in time.
- Plot the data over time (say monthly to start then quarterly),
- This will give you a clear impression of any improvement or deterioration.
You have decided to increase the rate of your cashflow.
There are 4 areas where the Cash Conversion Cycle (CCC) can be accelerated.
For more detail on CCC go to the Cash Conversion Cycle article.
1. The sales cycle:
Ways of making the sales process faster to generate cash faster.
The list of articles on sales improvement are here.
2. The workflow cycle:
Reduce the time it takes from raw materials entering your business until the point of delivery to your customer .
The customer is billed earlier and your cash recovered faster.
The list of articles on workflow are here.
3. Accounts Receivable and Accounts Payable cycle:
Send bills out as soon as possible.
Follow up Accounts Receivable outstanding.
Get the cash owing as soon as possible.
The article "Boost Your Accounts Receivable" gives15 ways to improve your Accounts Receivable cycle.
4. Inventory and Work in Progress:
This is the process of streamlining your production cycle as much as possible.
Reduce the amount of cash tied up in Inventory (raw materials and completed work) and Work in Progress (WIP).
The list of articles on Inventory and Work In Progress are here.
Activities to Improve Your Cashflow
Following are a host of activities that you could do to improve your Cashflow.
Select the ones that are applicable to your business.
We refer to articles within Profit Savvy that cover the topic in greater detail.
To improve your cashflow, you want to pay your suppliers as slowly as is reasonably possible.
The "Cashflow Wizardry" article shows how Amazon and Dell Computers use this method to fund their blistering growth.
Monitor your Cashflow carefully.
This will ensure that you have money available to pay your suppliers and other expenses. Example, Wages and Tax.
The "Profit Autopilot" series talks about how to achieve this at an introductory level.
Synchronising Company Expense
Is your billing cycle for your customers aligned with the billing cycle of your suppliers?
Does that cycle align with the payment of your Operating Expenses?
For example: Wages.
- You bill your customers monthly.
- You pay your Salaries weekly.
- It will take at least 4 weeks to get the cash that you need for your Salaries.
- You run the risk of always being short of cash.
Speed up your cashflow
Try billing your customers and paying your staff each fortnight.
You will have income coming in at the same frequency as one of your largest expenses goes out.
For example: Billing cycle
- Synchronise your suppliers billing cycle with the billing cycle of your customers.
- Don't pay your suppliers in a faster cycle than your customers are paying you.
- If you do, you will outlay money with your suppliers before you receive it from your customers.
The following articles in Profit Savvy relate to improving your cashflow: