Ways to Improve Cash Flow (Part 1 of 2)
The Kauffman Foundation conducted a study on the fastest growing Fortune 500 companies. These were "successful" companies in that they were growing quickly, acquiring massive amounts of new customers, expanding their brands, and disrupting their industries. However 3-5 years after being featured on the cover of Fortune Magazine, two-thirds of the companies were found to have "failed". Meaning, they were either sold at a disadvantage, forced to downsize, or starting back at square one. The reasons varied, but ultimately came down to the ability to manage cash flow. The 33% of companies that did survive this growth period and transition into maturity were the businesses that managed their cash flow wisely.
For companies wanting to improve their cash flow, here are seven ideas that can be implemented, regardless of business stage - startup, growth, maturity, exit.
“Cash is king. Without it, you don't pay bills. You don't acquire new companies.” - Richard Loth
Before we get into the “how”, let’s talk about the “what”. What is healthy cash flow? How do you know if you need to improve your cash flow situation?
"Healthy" cash flow can be defined as positive monthly cash month after month. Even in a "healthy" business, you may have periods of negative cash flow. Sometimes negative cash flow in a healthy business is the result of seasonality or expansion. It's not always an indicator that something is wrong. However, having many months of negative cash flow is a concern to research further. Negative cash flow patterns mean that you may not have enough cash to support your operations or that you will not be able to take advantage of investment opportunities that come your way. Healthy Cash Flow also helps build PROFITABILITY into your company.
Formally, you measure the cash flow of your business on the company's Cash Flow pro forma Statement. The key is to compare the monthly numbers and look for PATTERNS. Small changes can have a huge impact in the cash flow health of your business. Here are seven tips you may want to consider to improve your company's cash flow situation:
Expense Audit
I preach about expenses often. Whether these are in your personal or business life, getting your expenses under control can be the difference between making it or breaking it. This is one of the least favorite activities my clients like doing, but has led to $10s of $1000s of dollars saved. An expense audit is a great way of opening one's eyes to habits that can be hard to pin down, or finding wasted dollars.
Step 1: Download last 12 months' expenses from credit cards and bank accounts
Step 2: Sort by "vendor", "chart of accounts", or "description"
Step 2: Categorize into "Needed" or "Not Needed"
Look for recurring, overspending or unknown items
Step 3: Have a strong case for each "Needed" expense
Step 4: Create a future budget using the "Needed" expenses to help forecast cash flow
Step 5: Cancel any expense that is "Not Needed"
2. Pay Slow, Get Paid Fast
You always want to pay your vendors and bills on time. Remember, your vendors are also businesses and can be your biggest cheerleader. Their success depends on your success. However, if you can "pay them slowly", it will help your cash flow. Are you able to extend your payment terms with your vendors? Can you move your Accounts Payables out to 60 or 90 days? Can you ask to pay a small deposit up front, then the remaining balance later? Can you ask them to put you on a monthly payment plan instead of paying completely up front? I offer a monthly subscription plan to my clients because I realize the importance of good cash flow for business owners.
On the flip side, you want to ask your customers to pay you fast. Pay close attention to your accounts receivables. First, take care of any overdue accounts. If someone owes you money, don't let it go overdue. Make time to call your customer and ask for payment. Reduce your accounts receivables to 30 days if possible.
Make it easy for your customers to pay you. Have a URL link where they can pay you directly. If you have a subscription offering, make sure it comes out automatically from the customer's account. Put that URL link in your email, on your website, in your newsletter, on a QR code, or any other place your customer will be looking. Don't make it difficult for them to pay you, else you risk falling to the bottom of their "to-do" pile.
Ask for large deposits up front. Try to get at least 50% down upon contract signing. Get the remaining balance as soon as possible. Even better, get the entire balance up front.
3. Subscriptions
Subscriptions can be a double edged sword. Many SaaS (Software as a Service) companies thrive on monthly or annual subscriptions. It's great business model to have because the cash flow is dependable. However, many people sign up for subscriptions that they never end up using or forget that they have access to. If you are a subscriber, pay attention to how many subscriptions you have when you walk through your expense audit. Ask yourself if you are getting the return on investment with each subscription.
However, subscriptions can be your friend if you are on the receiving end. Setting your client up to pay you monthly will help you forecast your cash flow accurately and dependably. To improve your company's cash flow, determine whether or not a subscription type of payment plan will work for your customers.
(Stay tuned for Part 2, coming later this week)
