Let the Cash Flow Game Begin

Prices are soaring, staffing is tight and interest rates are rising. Keeping the cash flowing within a business is becoming harder. Being profitable does not always mean that cash is aplenty. It definitely helps, but other items can impact the cash flow.

There really are only a few factors that increase a business’s cash flow. However, there are multiple ways to make those changes. Changes that are unique to each business. Let the cash flow game begin.

Rules of the game: There are basically seven factors a business owner can consider to increase their cashflow….

  1. Increase your prices.
  2. Sell more
  3. Reduce your direct sales costs
  4. Decrease overhead
  5. Reduce inventory and work in process
  6. Take longer to pay your vendors
  7. Collect from your customers sooner

Step 1. Determine your business’s current score.
How much cash is the business generating or using each month? To Calculate the net cash that flowed in your business over the last month. Start with your current balance sheet. Calculate the cash balance less bank debt at the beginning of the month. Calculate again using the balances at the end of the month. Subtract the two. That is how much cash you have flowing in or out of the business in 1 month.

How much working capital does the business have? At any point in time working capital = Accounts Receivable + inventory – accounts payable. These are the operational assets that a business has to generate and use cash.

Based on the 7 factors noted before, where is the business at now? Pricing, sales volume, gross margin, monthly overhead, inventory on hand, how long to pay your vendors and how long does it take to collect to from your customers.

Step 2. Assess your current situation.
Review your sales cycle. What will happen if you raise your prices? Is it feasible to sell more? Can you change your customer terms or enforce our terms and collect from them sooner? Verify that you are selling at a positive gross margin for each customer.

Review your production & delivery cycle. Can you become more efficient and reduce labor needed, materials costs, packaging costs, shipping costs, etc.? How much inventory do you need on hand available for sale, packaging materials or raw materials?

Review monthly overhead. What do you truly need?

Step 2. Brain storm ideas. Keep an open mind. Look at other industries.

Step 3. Evaluate the ideas. Calculate the potential cash improvement, determine the ease of implementing and cultural fit in the business.

Step 4. List actions you can take and then Prioritize.

Step 5. Take action.

Step 6. Monitor your progress and Repeat the process.

Cash is essential. It is the lifeblood of a business. As a business starts many systems are put in place randomly. Your business model determines the opportunities and limitations. The cash flow game improves your business model.

If you would like assistance in improving your cash flow, contact our office and set an appointment for a cash flow efficiency review.

By Mary Guldan-Lindstrom, CPA

Leave a Comment

Get Printed Copies Of the Newsletter