When a company is growing at a rapid rate, you need to ensure that you have sufficient sources of cash to fuel growth—many business owners underestimate how important it is to keep a very close eye on the cash flowing in and out.
Most will look at the profit and loss statement, see that it shows a profit, and assume that they have cash in the bank or sufficient cash to continue fueling the growth. This is how businesses run out of cash and have to close. Cash is the oxygen of the business and without it, the business dies.
When cash becomes tight, the first place owners will look is outwards, towards those who have access to cash—friends, family, banks, investors, loans credit cards etc.
The Power of One
Allan Miltz, Founder of Inmatrix and Pearl Finance Australia and well-known speaker on the subject of cash, identified seven main financial levers that are available to business owners to improve their cash flow and profitability.
By applying just a 1% or 1-day change to one or each of the following items, it can result in significant improvements to the business model:
- Price – Increase the price of your goods or services by 1% or more. This is a subject that most business will shy away from for fear of loss of customers however you will be surprised how elastic your price can be. When was the last time you raised your prices and/or compared your prices to your competition?
- Volume – Increase the quantity sold. Take a look at what sales and marketing strategies are working and do more of those and less of those that are not.
- The cost of goods – Pay less for raw materials. When was the last time you reviewed your supplier base and costs? A regular review is recommended to ensure that you are getting the best price and service in the market.
- Operating expenses – Decrease the cost of running the day to day operations. This involves a review of the percentage of players you have in your business and a discussion of how smoothly your execution disciplines are running. A highly effective way of reducing expenses is to eliminate wastage; we would recommend the lean methodology to achieve this.
- Accounts receivable – Receive money owing in a shorter number of days. Ensure that you have a good relationship not only with the business owner but with the person in accounts responsible for issuing your cheque as this is where the bottleneck often occurs.
- Inventory – Release cash by not holding as much stock. We often find that companies will hold stock for that “just in case” situation which seldom occurs. By operating with a “just in time” mindset, you will find that it is very easy to halve your inventory days hence freeing more cash in your business.
- Accounts payable – Take longer to pay those you owe. We always encourage business to ask the question of their suppliers “would it be possible to negotiate better payment terms in return for a more sustainable relationship?”
The benefits of focusing on cash management have the obvious result of you being more aware of your current and future cash position. But it also increases your business acumen, which leads to better decision making as you continue to grow your business.
So while it is essential to keep a focus on growing top line revenue, which makes everyone feel good and drives the ego of the organization, a daily focus on your cash position is vital to ensure that you do maintain consistent sources of money to maintain your growth.