By Sue Hirst, CFO On-Call
This is one of the biggest small business growth challenges. You would probably expect cash flow to improve when your business grows and profit increases. The reality however, is that growth can cause cash flow problems. This is because each sale you make needs to be funded by what is commonly known as ‘working capital’.
You can see in the diagram below, that when a sale is made, it can be as much as 171 days that the money isn’t in your bank account.
On day 1 you buy stock to sell
On day 46 you pay your supplier for the stock
On day 101 you sell the stock
On day 217 you get paid for the stock by your customer
Between day 46 and 217 your money is with your supplier and your customer.
Whilst this example shows a business selling stock, a business selling services or jobs has the same issue, due to costs associated with labour and materials purchased to complete a job.
We’ve illustrated here that funds are required to make a sale – when sales increase, it follows that more funds will be required for business growth.
The burning question is ‘Where is the money going to come from to fund your sales growth?’
Here are some tips for improving business cash flow:
1. Bank overdraft facility – lenders require financials and often security
2. Invoice Finance – you get paid by financier within days of invoicing and pay them back when your customer pays. Costs have an impact on profit, especially if low gross margin business
3. Owners’ equity/loan – shareholders’ inject cash into the business. Need to monitor return on investment for shareholders, to ensure it compensates for other investment opportunities
4. Trade Finance – for importers/exporters. Some providers have great portals that ‘smooth out’ the whole process of transacting overseas
5. Leasing of equipment to reduce impact on cash. Interest applies, but good rates can be achieved
6. Reduce time customers take to pay – implement systems to chase and track payments. Systems can be very cost effective and once it’s up and running it becomes ‘business as usual’ and less of a hassle to collect payment
7. Extend credit terms with suppliers – analyse how much business you do with them and negotiate better terms or find alternatives. Very cheap form of finance, as suppliers normally don’t charge anything for it!
8. Reduce time stock sits in store – implement ‘Just in Time’ stock management system. Think of stock as dollars piled up on the stockroom floor! A good system can do much more than just maximise stock turnover i.e. analysis on margins by product, customer, division, branch etc
9. Reduce time jobs are in progress prior to invoicing – implement a job management system. A good system can help with quoting, delivering, invoicing, scheduling, materials management and profit analysis
In the case of stock and job management systems – once implemented they can be very easy to maintain and have a big impact on profit, cash flow, productivity, customer satisfaction etc.
These tips could be the difference between sustainable business growth or growth with cash flow problems and lots of headaches for business owners.