We see many businesses that are growing profitability, but are having difficulty continuing their growth specifically due to the lack of cash. You’ve heard the expression ‘cash is king’, well it is true.
Several things can be done to ensure this does not happen to you. Even if you are growing profitably and you have enough financial resources to fund the growth, improvements in cash flow will enhance your profitability with the ability to pay down debt or take advantage of vendor discounts.
The following are the 7 best ways to enhance your business’s cash flow:
1. Negotiate better terms with your vendors – payment terms of 40 days vs. 30 days significantly enhances cash flow – a business with vendor related costs of $14m that extends the average days to pay from 30 to 40 days enhances cash flow by $400,000!
2. Get some cash down up front - This is a great way to have your clients fund the projects not you.
3. Be careful with your payment terms with customers – balance due on completion is much better than 30 day terms. If you do extend credit terms, be diligent in your collection practices. Even slight improvements in day’s sales outstanding (DSO) can be a significant enhancement to cash flow. If you are a $20mm business with $2.2mm in accounts receivable, a 5-day improvement means a $274,000 incremental increase in cash flow.
4. Manage your inventory better – the same principal as DSO and average days to pay applies to days of inventory on hand. Any improvement here has serious implications to improve cash flow.
5. Watch your operating expenses. For most businesses, the most significant operating expense is payroll and payroll related cost, but carefully watching all expenses is imperative. Any improvement directly enhances cash flow.
6. Use a line of credit at the bank to plug any shortfall of cash flow and allow you to take advantage of vendor programs
7. Watch what you take out of the business. Shareholders use the business to pay business related and other expenses, but anything you take out directly reduces cash.
Additional cash generated by using the above techniques can be used to grow the business, to paydown debt, or to take advantage of quick pay vendor discounts. Remember taking advantage of quick pay discounts is an excellent way to leverage your cash flow to enhance profitability. Taking advantage of a 2%10, net 30 discount returns approximately 37% – so it may make sense to tap your line of credit occasionally to take advantage of the vendor discount.
Use the following formula to calculate the cost of not taking a discount.
Cost of failing = Discount % X 360
to take discount 100% - Discount % Final due date - Discount period
So, in the 2%10, net 30 example above .02/.98x360/20 = 37% - That’s a lot to give up by paying in 30 days instead of 10.
Fractional CFO Services including Strategy Execution, Profit Improvement, Cash Flow Strategies, Business Consulting, Business Owner Coaching, Staff Training, and Special Projects.
