Five Strategies for Mastering Your Business Cash Flow

The start to solving cash flow problems begins with knowing your business cash flow cycle.  The business cash flow cycle defines the timing of cash flows in and out of a business.  It begins with available cash that is invested in assets, direct costs, and overhead expenses required to generate sales from customer purchases.  The payment received from the sales made closes the cash cycle for that sales transaction putting cash back into the business for the next cycle of cash outflows required to generate sales at a profit.

The following business cash flow cycle shows the timing of cash flows in and out of any business.

The most common business struggle with cash flow occurs every time cash flows out of the business are faster than the cash coming into the business.  The figure below shows how easily the business cash flow cycle becomes unbalanced when cash is spent faster than collected.

You reduce your business cash flow cycling out of your business faster than into your business by adopting five critical success factors promised to improve your business cash flow cycle:

1. Issue sales invoices promptly, ideally at the time of delivery.
2. Understand the payment terms for your industry to time your A/R terms and A/P practices.
3. Manage your accounts receivable (A/R) collections consistently, so people pay you on time.
4. Set up favorable payment terms with your suppliers and vendors, so you don’t pay them too soon.
5. Make sure your asset investments are generating adequate returns to avoid cash outflows exceeding cash inflows.

Strategies for improving the speed at which you receive your business cash flow from operations.

You keep your repayment commitments to those you owe money by adopting one of the following cash inflow improvement strategies.  The challenge in each of these strategies for improving the cash flow of your business lies in balancing out the pros and cons of each strategy.  The pros typically come down to protecting cash, while the cons lead to negative impacts on profitability.  As you consider the following list, don’t forget to consider the profit implications, should you decide to act on any of these cash flow improvement strategies:

1. Require deposits or insist on cash payment at the time of service or product delivery.
2. Offer discounts to customers who pay early.
3. Cease offering payment on credit or adhere to strict credit payment terms.
4. Implement a late-payment charge that is communicated upfront and strictly enforced.
5. Accept credit card payments.
6. Offer automatic bill payments to customers.

When sales slow, the number one rule of business is to conserve cash.

Anytime sales slow, the number one cash flow strategy is to conserve cash.  This strategy is critical in the near term for businesses with few fixed costs.  For most businesses of significant size, conserving money this week comes down to using one of the following cash conserving strategies:

1. Cut unnecessary expenses.
2. Reduce inventory.
3. Delay paying invoices until a few days before they’re due.
4. Negotiate delayed payment terms with suppliers, if necessary.

In the long-term, conserving cash for larger businesses comes down to managing expenses downward as a percent of sales.  This is most effectively done through P&L Statement variance reporting for actual-to-plan and year-over-year results for the same accounting period.

Do you want to learn how to fix your cash flow problems?

If you want to improve cash flow, let us help you see how you can better use your financial statements to assess how your cash flow cycle has changed, click the link below for your “free” financial variance report from a BusinessCPR™ certified Business Scientist.

Within twenty-four hours of receipt of your multi-year P&L Statement and Balance Sheet, you will receive back by email your free year-over-year financial variance report for immediate use.  Use this report to see how you can better improve your cash flow cycle.