Mastering Cashflow
Mastering cash flow is the key to business success. The first step is to truly understand how money moves in and out of your business. There are the top 3 areas to focus on.
- Cash lockup
- Stock turn
- Gross profit
Cash Lockup
One of the primary causes of poor cash flow is cash lockup, which occurs due to delayed billing or payments.
When businesses do not bill their clients promptly or face delays in receiving payments, their cash flow is not flowing. It is essentially in somebody else’s bank account. It is your job to be proactive and get it into your bank account as soon as possible.
Tips for Small Businesses:
- Invoice customers sooner and consider progress billing for long-term projects.
- Have clear terms of trade and payment deadlines.
- Make it easy for customers to pay online or with specific methods.
Real Life Example: A small construction company implemented progress billing for their long-term projects. By invoicing clients at various stages of the project, they were able to maintain a steady cash flow and reduce the time spent waiting for payments.
Stock Turn
Slow moving inventory can hurt cash flow because money is tied up in unsold stock. Businesses can find ways to turn stock into cash faster, like offering discounts on slow-moving items, improving inventory management, and forecasting demand better to avoid overstocking.
Tips for Small Businesses:
- Develop a stocking strategy, including safety stock, desired stock levels, and re-order points.
- Use software to measure stock levels in real time.
- Implement clear policies to avoid slow moving stock items.
Real Life Example: A small retail store used inventory management software to track their stock levels in real time. By identifying slow moving items, they were able to offer discounts and promotions to clear out old inventory and free up cash.
Gross Profit
Insufficient profit to cover costs can lead to cash flow problems. Increasing gross profit margins can significantly improve cash flow.
Businesses can achieve this by increasing prices, reducing the cost of goods sold, or improving operational efficiency to lower overall expenses.
Tips for Small Businesses:
- Reduce stock shrinkage and avoid discounting.
- Minimise obsolete stock for retailers.
- Focus on rework, wastage, and ensuring all work and materials are billed for contractors.
Real Life Example: A small cafe reduced food waste by implementing better inventory management practices and training staff on portion control. This change increased their gross profit margins and improved their cash flow.
