Most businesses experience cashflow difficulties at some stage. How do you improve the flow of cash into your business? Increasing your sales seems the obvious way to improve your cashflow, but this is only one of many possible tactics. This guide offers some ideas and a checklist at the end to help you draw up an action plan for your business.
All businesses would welcome extra cash to pay bills or to expand. This guide looks at tactics you can employ in three areas of your business to raise these extra funds.
- Internal sources
- Your customers
- Your suppliers
1. Internal sources
People often overlook internal sources of cashflow improvement. Before you look anywhere else, see how much money you can release from within your own business through improved management.
Use cashflow forecasts to anticipate difficult periods and seasonal fluctuations
Good management begins with the ability to anticipate what lies ahead. Regular cashflow forecasts will show you when cashflow difficulties are likely to occur (such as seasonal dips) and will enable you to plan for shortfalls. You will also make a more favourable impression on lenders if you approach them for finance well beforehand rather than during a cashflow crisis.
Plan for your commitments
Set money aside in advance for tax obligations and also for major bill payments. For more on this subject see the related Solution Guide: ‘Tax made simple.’
Review or renegotiate your financing options
Speak to your Business Banking Manager about different financing options. Is the structure of your financing balanced, and are you using the right kind of finance (for example, short-term versus long-term finance)? Could you make any changes to improve your cashflow position?
Reduce stock levels
You can get the quickest cashflow results from more efficient stock control - or getting rid of surplus stock. Stock is ‘money in chains,’ so look hard at your stock levels. Identify your fastest moving stock and concentrate on that. Hold a sale to free up cash by getting rid of outdated, surplus or non-core stock. The most efficient businesses are those that can turn their stock over quickest. Consider this: if you normally carry $50,000 worth of stock and you can reduce that by 20%, you can put $10,000 into your bank account. Could you achieve this several times a year?
Increase sales (particularly cash sales)
Brainstorm the quickest way of increasing cash sales. For example, delegate a staff member to contact the top 20% of your customers who give you 80% of your business. Offer them special deals or discounts for prompt cash payments. Could you sell them additional or complementary products or services?
Reduce overheads
Pay close attention to your business expenses over a six-month period to get a feel for where the money is going. Identify what you can cut back without affecting your service levels. Ask the hard question: “Are these dollars I’m spending really earning money for my business?”
Review or defer all expenditure
If you need office furniture or equipment can you buy second hand rather than new? Do you really need a luxury car? Could you downgrade one level? Ask: “Do we need to do this now? Is it going to be productive?”
Look for extra income
Do you have excess office or warehouse space? Could you rent out part of your office or facilities to bring in more cash? Could someone hire your equipment after hours? For example, a hairdressing business rented out its central city salon at night to a person who operated it as an all-night salon.
Sell assets, rent or lease equipment
Are there any unproductive assets you could sell? Could you sell and lease back certain equipment? Should you rent or lease capital equipment instead of buying it? Ask your accountant for advice here.
Tighten systems and control staff
Keep control of your own business. Who signs cheques and makes buying decisions? Reduce opportunities for theft or fraud or simply for thoughtless spending. One businessperson found staff had ordered sufficient stationery to last for five years ‘to take advantage of a good price.’ This money could have been better spent on growing the business.
Subcontract rather than employ
Could you save money (and administrative expenses) by subcontracting certain work rather than employing someone?
Factor your invoices
Raise money quickly by discounting your invoices to a factoring company.