Specialists: Brenton Lawrence
It’s often described as the most important financial factor in your organisation, the lifeblood of your business and subsequent poor practices can lead to crippling effects: I’m talking about cash flow. In this article, I present and discuss five cash flow releasing tips that enable freedom of choice opportunities.
1. Issue and collect invoices faster
A troubling trend has developed in Australia. On average, invoices are serviced 26.4 days late beating out Mexico (18.6 days) for the world’s longest overdue rate. This concerning statistic should give pause to review your organisation’s invoicing architecture and if necessary, spur corrective action. To improve your invoicing function, here’s what you should do:
- Invoice and collect faster.
- Design a professional and easy to understand invoice.
- Consider and be wary of client payment cycles.
- Follow up with statements and phone calls.
- Where appropriate, employ a debt collection agency.
Be timely with your invoicing and always follow up. You earned it.
2. Review inventory and work in progress items
You may be surprised to find a significant amount of your cash is tied up in inventory or work in progress. For those holding stock, the first port of call is to examine legacy systems and subsequent procedures. Is your inventory management system outdated? Are your inventory turnover ratio projections reliable? Have you contemplated price discounting to clear old stock, free up cash and invest shelf space in newer items? If not, you should.
Given the concerning trend of overdue invoice servicing, it is wise to enact progress billing. From launch to completion, months may transpire. Are you prepared to commit time, energy and money to a project without recouping fees until wind-up? You have personal and professional financial obligations. Don’t push them to the side, bill as you go.
3. Be aware of your cash conversion cycle and forecast your cash flow
The saying goes “good things come in small packages” or in this instance, good things come in shorter packages. The cash conversion cycle (CCC) is an efficiency ratio which measures the time a company’s cash is tied up in inventories and accounts receivable. In plain speak, CCC determines how quickly the organisation turns its activities into cash. Calculate your CCC then identify what needs to be done to shorten it.
Article after article stress the importance of understanding cash flow and for good reason. Cash flow tracks the inward and outward flow of cash in your business. It’s an incredibly useful strategic tool as it allows over-the-horizon forecasting. When in command of projected cash flow information, savvy and forward-thinking organisations plan for the future: they become proactive rather than reactive.
4. Simplify your business processes
If “time is money” how many hours are lost to unproductive, cumbersome and overly complex operational procedures? Chances are, staff are in the same boat. Quick calculations and consideration of the compound effect across your organisation should raise eyebrows.
Inefficient and dysfunctional processes can lead to unhappy customers, internal tension, expired deadlines and increased costs. To streamline efforts, consider mapping out all processes, investigate bottlenecks by analysing flowcharts, eliminate problems through redesign, acquire required resources, implement and communicate benefits of the change (it’s critical all staff understand and follow the redesigned process) and finally, commit to monitoring and continuous improvement.
Simplicity is the death of complexity.
5. Pay down debt quicker
If you followed points one through four then you should have significantly improved your cash position and it’s time to put it to work. In the event your organisation is carrying loan obligations or earns interest income on extra cash, consider the following:
- De-risk your business and free up security for future projects.
- Improve profitability by paying less interest.
- Save money by reducing loan obligations.
Don’t let debt run your business.
Running a small-medium enterprise business is more than a commitment, it’s a bridge to a bigger, better and brighter future. That’s why we offer a suite of services and designed a program to assess and assist small-medium enterprise businesses. Say hello to Cash Growth Value. At Nexia, we’d welcome the opportunity to show you how this program will enhance and enrich your business experience.
To see how cash growth value works, contact your local Nexia Adviser today.
