Cash flow is the lifeblood of every business. Without cash, you are dead. This is even more important when a business is growing. I have a saying that ‘growth kills.’ This is because with growth, costs increase and if that business doesn’t have a good cash flow cycle to begin with, they will simply run out of money (yes even if they are making a huge profit!)
The amount of business’s I know that start a job, work on it for 60 days, invoice the job once completed, then wait another 30-60 days for the customer to pay their invoice. That is 4 months from starting the job! When you are paying wages, contractors, suppliers immediately, it’s not hard to work out why most business’s run out of cash.
As an accountant, it is ridiculous how many business owners I meet with at the end of the year and the meeting goes like this:
Michael - Hi Mr/s X, this year you have made $100,000 and you are required to pay $30,000 in tax by May.
Mr/s X – how can that be the case? I have $20,000 cash in the bank. I haven’t made $100,000.
Wouldn’t it be nice to know how to have that 100,000 in your bank account? It’s really quite simple.
There is only 3 ways to improve your cash flow cycle.
1. Decrease your accounts receivable days – how many days does it take to collect your cash from a customer from the time of invoice? If this is more then your terms of trade then you need to get advice on how to improve this as it is costing you! I know business’s that have negative accounts receivables, that is, customers are funding their business, not the other way around.
2. Increase your accounts payable days – how many days does it take to pay your suppliers from time of invoice? Money in your bank is better then money in your supplier’s bank. Sure, I get some suppliers are important to be paid on time so they do not interfere with the timely supply of goods and services to your business, but the majority are not. Extend their payment terms (I like to add here that you should extend all suppliers payment terms except your Peer Wealth invoices ). Have only one pay day per month, I like the 15th. When suppliers know that they will be paid on the 15th, they will stop chasing and you will see your cash levels go through the roof!
3. Decrease your stock/inventory/work in progress level- the majority of business’s have stock, inventory or work in progress. Even builders, financial planners, lawyers, accountants and mortgage brokers in the form of work in progress. Excess cash tied up here is pointless. With cloud software available now that helps track inventory, having excess lying around is unacceptable. Do you know how long it takes on average to sell a product? Do you know how long it takes on average to invoice a job from the start date?
There are many ways to improve any one of these points. The trick is to find the right one for your business. Don’t go out and implement them all. Test a few things, find out if it works, react fast if it doesn’t and keep it going if it does.
The important thing to note here is you need to plan the following:
1.Where you are now
2.Where you want each of these numbers to go to
3.How you will get there
Once you have that, to be successful in delivering the plan, you need to measure along the way and get someone to keep you accountable to your plan.
Remember, “What gets measured gets done.”