Cash flow is the lifeblood of any business. Companies can often survive short-term periods of unprofitability, but a serious cash flow crunch may prove fatal.
Creating a strategy
Ensuring that your business has adequate cash — or working capital — on hand to meet ongoing operating expenses requires a strategy designed to strengthen working capital management and boost cash flow. Here are three ideas to consider:
1. Shorten your cash flow cycle. Your goal should be to accelerate inflows and decelerate outflows. Truncating your cash flow cycle by 10 to 15 days can significantly boost your working capital.
The former starts with receivables: Are you actively managing collections? This includes enforcing your credit terms and aggressively going after delinquent accounts. If your payment terms are net 30 days and payment hasn’t been received, someone in your accounting department should be contacting the client (by either e-mail or phone) on day 31.
On the outflows side, take full advantage of your suppliers’ payment terms. If they’re offering net 30 day terms, use electronic banking to make the payment on day 30. Also, negotiate with suppliers for extended payment terms: Will they stretch net 15 terms to net 30 days — or net 30 day terms to net 45 days?
2. Reduce operating expenses and overhead. Go over your income statement with a fine-toothed comb in search of expenses that can be cut. Start with big items like your rent or mortgage. Can you negotiate a lower rent with your landlord or refinance your mortgage? How about implementing some simple energy efficiency improvements — for example, drawing the shades in the summer and adjusting the thermostat a few degrees — to lower your utility bills?
Also take a close look at your travel and entertainment expenses: Can you pare these down by conducting more meetings via videoconference instead of in person? Can you cut back on expensive meals and, if applicable, sports and concert tickets for clients?
Next, focus on the little things that can add up over time. Shipping costs are a good example: Employees often send packages overnight when two- or three-day shipping would suffice.
3. Streamline inventory management. Inefficient inventory management is one of the biggest cash drains on many businesses, depriving them of valuable working capital. Excess inventory is literally cash wasting away in your warehouse or on your shelves. So do everything you can to minimize your inventory investment.
If you’re a manufacturer, one of the best ways to do this is by implementing just-in-time (JIT) inventory management. It involves having raw materials delivered just as they’re needed, rather than weeks in advance.
If yours is a retail business, scrutinize your inventory and categorize items based on their likelihood of selling. Hard-to-sell items should be marked down and moved out to make room for more popular merchandise.
The key to successful working capital management is taking steps to boost cash flow before a working capital crisis strikes. Contact us to discuss how these and other strategies can help you strengthen cash flow to ensure adequate working capital at all times.