The ABCs of Improving Business Cash Flow

In business, cash really is king, as the saying goes. Workers won’t stick around if they don’t receive paychecks on time and suppliers won’t continually extend credit. It’s a lesson many business owners have to learn, sometimes painfully. That’s why, regardless of the industry – whether it’s manufacturing, distribution, financial or service – aggressively managing cash flow is key to success. The faster cash flows are realized and received, the faster the funds can be invested back into the business and put to use.

However, managing proper cash flow is not luck. It’s all about good planning for the entire business cycle and driving continuous improvement within each area of the business. This includes, but is certainly not limited to, the cycle from the initial sale through to delivery. Every day counts, which is the primary reason working capital and cash flow are measured in days.

When a company is struggling in this area, there are some adjustments to a few of the business metrics that can have a significant impact on cash flow and, ultimately the company. They are:

Accountability for the key elements of the business cycle.

Relative cash flow is the #1 indicator of the health of a company – and the success of your team. It is therefore  critical to assign each component of the cash flow process to each member of your executive team so they are responsible for overseeing income and expenses. Recommendations include the following:

  • Sales should be reported to the sales and marketing leader.
  • Cost of goods sold should be reported to the COO or the general manager.
  • Selling, general and administrative accounts should be reported to the controller.
  • Debt / interest should be reported to the treasurer.
  • Payroll and its associated expenditures should be reported to the human resource leader.
  • Taxes and tax planning should be reported to the financial leader. (It is imperative that tax planning be proactive, not simply conducted post year-end.)

Business Process Optimization is a long journey, but each step in the right direction will reap tangible benefits. A few general opportunities include:

  • Be aggressive, but fair with your clients when it comes to Accounts Receivable.
  • Explore down payments.
  • Get invoices out as soon as possible.
  • Consider adjusting your pricing.
  • Inventory turns will  have  the  largest  impact  on  your cash flow  for  a  manufacturing  entity.  (A detailed blog was prepared on this topic. See blog/2013/6/17/inventory-turns for more information.)
  • btain additional quotes on a regular basis, even if it’s simply to confirm you’re getting the best deal.
  • Dual source wherever possible. Competition is good!
  • Align payment terms for payables and receivables. If creditors are demanding payables in 30 days and customers are paying in 45, you will run out of money.
  • Check your occupancy costs. If you can, reduce your utilities, phone services, etc. by renegotiating contracts or switching to different vendors.
  • Aggressively diversify your customer base so you are not relying on a single source for the majority of your revenues. 
  • Decrease direct variable costs by increasing the value-added to  non-value-added  ratio.  Do  so  by  optimizing the wait, rework, travel, preparation (e.g. retooling) and administrative aspects of production labor. Warning signs include high production labor costs, high absenteeism, high inventory carrying costs, low quality, multiple shifts, overtime, poor customer service and poor cycle times, all of which negatively impact cost of goods sold.
  • Make sure your ERP and Product Data/Lifecycle Management technology is working for you.

Conducting a Comparative Analysis – or “benchmarking” – is key. If you are comfortable with your cash flow, then there’s a problem. As Thomas Edison once said, “Show me a thoroughly satisfied man and I will show you a failure.” Be sure to compare quarter-to-quarter, year-to-year, and industry specifics and also explore the best-of-breed companies to determine how  they have achieved their success.

Keep in mind, good cash flow management can alert you to trouble – and help you head it off – well before it strikes. It will also help you fuel and drive your company toward growth, strength, and achieving organizational goals.

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