As a business leader, it is no secret that there is a sea of metrics by which to assess performance, and the waters are not often clear.
Which numbers matter? Which forms are essential? When should you be concerned?
Well, as the old saying goes: cash is king.
When it comes to financial due diligence–the art of identifying risks and understanding drivers of profitability–a business’ ability to create cash is the name of the game.
But isn’t becoming a “cash cow” reserved for the Wal-Marts and Costcos of the world, those juggernaut companies that have been around for decades and have a veritable license to print money? Don’t the “Average Joes” have to walk the tight rope of lending and receiving, hoping to bring in enough each month to stay one step ahead of the creditors?
Not necessarily.
Keep reading as we dive into a few straightforward tips all businesses can use for stabilizing cash flows in weeks, not years.
Tighten Receivables
Turn green ink on paper into cash in the bank.
That’s the magic of tightening receivables.
How do you pull this off?
Shorter payment terms. Faster invoicing. Consistent follow-ups.
It all reduces the amount of time cash is tied up in outstanding invoices. This directly improves your company’s liquidity without requiring additional sales.
Other cash-flow benefits of tighter receivables include reduced uncertainty and less reliance on credit. With clear credit policies and proactive collections, it makes cash inflows more predictable. This decreases reliance on credit and emergency funding to cover payroll and other day-to-day expenses, lowering interest accumulation–and stress buildup–along the way.
Trim the Fat
Save more than you spend.
It doesn’t take an MBA to realize that’s how to get ahead in the world of finance.
However, as elementary as this advice is, it can be incredibly difficult for business owners to follow. There are many waste areas that can cause a business’ cash to evaporate, including:
- Unused or underused subscriptions and software
- Excess inventory
- Too many low-margin customers
- Inefficient vendor contracts
- Manual processes that lead to rework
When less money leaks out, more cash stays home. Pretty simple. Take a look at 2-3 months of income statements. Cut out expenses that are not driving revenue. Reduce waste in inventory, processes, and labor to free up working capital and improve short-term liquidity.
Perform Value Triage
Make more money doing the same thing.
Sounds like a good idea, huh?
Unfortunately, too many companies struggle to bring this to fruition. Maybe they are blinded by a long-standing loyalty to a particular client. Maybe they erroneously believe that higher sales volume equates to better profitability.
Whatever the case, companies trying to quickly turn around cash flows would do well to prioritize clients by their contribution margin. This can quickly be calculated by:
Revenue – direct costs – delivery = contribution to cash
The top 20-30% of your clients in terms of contribution margin are going to be the strongest cash sources for your business.
Circling back to tighter receivables, it is also worthwhile to factor in cash timing. Among your strong cash contributors, who pays fastest? Who prepays or pays on milestones? Which clients are least likely to dispute charges?
High contribution margins plus fast payment is cash flow gold. Prioritize these clients above all others.
Improve Forecasting
If we could only predict the future…
Although no one has the proverbial “crystal ball,” it is essential that business owners put their best foot forward in terms of forecasting. By reducing surprises, it limits risks and helps you act fast before cash becomes tight.
Look for early warnings of cash gaps. Where might receivables lag behind expenses? When identified early, you can delay spending to ensure that your cash reserves remain healthy.
Understand that forecasting and timing go hand in hand. Plan hiring and inventory buys around actual cash availability, rather than scramble for remedial solutions after you overextend yourself.
Analyze Key Metrics
Metrics upon metrics.
If cash is king, aren’t dollars and cents all that matters?
Yes, but the savvy businessperson knows which metrics drive the dollar signs. Here are a few of the primary drivers of cash flow:
- Burn rate – this shows how much cash your business spends each month. Knowing this helps you control outflows and identify when expenses are rising faster than cash inflows.
- Runway – this tells you how much cash you have left in the coffers at your current burn rate. It creates urgency and guides decisions such as staffing cuts, price changes, and/or fundraising.
- AR receiving – this shows how old your unpaid invoices are. It helps you predict cash inflows.
By understanding how fast cash is leaving, how long you can survive on your cash reserves, and how fast new cash is coming in, you have better understanding and control of your cash situation and can make adjustments as necessary.
Why Wait? Get Cash Flows Trending in Weeks
Healthy cash flows don’t have to be a “pie in the sky” dream. They can be a reality for your business. Tighten receivables. Reduce waste. Prioritize high-margin clients. These are the simple steps any business can take for stable cash flows in a matter of weeks. For more of the latest trends in business and entrepreneurship, explore the content at River Journal Online for the leading thought leadership in the industry!
