7 Steps to Improving Cash Flow

I don’t think I have ever visited with a business owner who didn’t think his cash flow could be improved. So when I become a Part Time CFO for a company, Cash Flow and Cash Management is the first area I look to improve. Following are 7 steps to improve your company’s cash flow:

1)      Know where you are and where you are going

  • Record all transactions daily! That is the only way to answer the next point.
  • What is your present cash position both your book and bank balance? The difference between the two balances is transactions that have not cleared the bank.
  • Prepare a 13 week and annual cash forecast that highlight anticipated cash in and cash out. Cash out is generally easier to forecast than cash in.

2)      Review Accounts Receivable Balances

  • How many day’s sales are in accounts receivable The formula is DSO=Accounts Receivable divided by (annual sales divided by 365)
  • For example: If you have a $125,000 account receivable balance in a company with one million dollars in annual revenues you would have 45.6 days in accounts receivable calculated as follows: $125,000/($1,000,000/365).
  • Here is a key point: what does one day’s sales equal? In the above example it would be $2,740 per day ($1,000,000/365).
  • If your terms are net 30 and in our example your actual balance is almost 46 days, you have over $40,000 of cash available if you get paid to terms!
  • Collections are cultural and take a commitment from the top to aggressively execute a collection policy. It starts during the sales process by setting expectations with the customer and ends when the cash comes in the door.

3)      Review Inventory

  • A similar computation for receivable will also indicate how much money you have tied up
  • Dollar by dollar reductions in inventory go straight to cash flow
  • Use economic order quantities and other tools to make sure you have the right mix of product and quantities on hand so as not to negatively impact sales & profitability

4)      Review Accounts Payable:

  • Take all discounts! The gain as a percentage is significant!
  • Pay to terms, not upon receipt. Too many businesses get in the habit of paying bills when they come through the door. More often than not it is a well intended accounts payable person working to keep their desk clear, not worrying about cash flow.

5)      Review Bank Financing:

  • It takes capital to grow a business
  • Match the capital structure to the use of the capital
  • Know when to increase the credit utilization as well as when and how to decrease
  • Business Funding is one of a part time CFO’s key concerns and knows when to go to the next step.

6)      Know when to raise outside capital

  • Outside funds are the most expensive form of financing
  • Consider Mezzanine financing and Private Equity Funds

7)      Do it all over again!

  • Cash Flow can be managed with consistently doing all of the above.
  • Focus on cash flow “bottle necks” and eliminate these constraints first

 Don’t become complacent. Constant vigilance is required to create a culture focused on cash flow. As a part time CFO I can help your company do all of the above and more.  Consider this, if you want your company to go to the next level, what does that mean? My thinking is that it means “Growth”, “Profitability”, “Increased Cash Flow”, and “Increased Company Value”. You can stay focused on your customers while a professional helps with the back office. Isn’t that better use of your time?

B2B CFO®    Cash. We Help You Get It®

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