Introduction:
Hi there! today we’re discussing how to improve cash flow in your business with some simple levers. We understand that for businesses, particularly small businesses, startups, and e-commerce ventures, maintaining a healthy cash flow is not just a financial goal, but a vital necessity. Through this post, we’ll share insights and strategies to enhance your business’s cash flow, drawing from our extensive experience in helping businesses thrive.
Understanding Cash Flow
Cash flow, in its simplest form, is the movement of funds in and out of your business. It’s the lifeline that keeps your operations going. But why is it so crucial? Unlike profit, which is a metric of earnings, cash flow is about liquidity and your ability to meet financial obligations.
For small businesses, startups, and e-commerce platforms, robust cash flow means the ability to fund growth, manage unexpected expenses, and maintain day-to-day operations without a hitch.
Strategies for Cash Flow Improvement
Reduce Debtor Days:
Debtor days (also known as Accounts Receivable Days) refer to the average time it takes for your business to collect payments from customers. The quicker this happens, the better you can improve cash flow in your business.
Strategies include offering early payment incentives, tightening credit terms, and regularly following up on outstanding invoices.
Reduce Inventory/WIP Days:
Excess inventory ties up your cash. By adopting just-in-time (JIT) inventory systems and improving demand forecasting, you can reduce the cash locked up in unsold stock.
Similarly, reducing Work-In-Progress days speeds up the production cycle, freeing up cash.
Increase Payable Days:
On the flip side, extending your payable days—how long you take to pay suppliers—can improve cash flow.
Negotiate longer payment terms where possible, but balance this with maintaining good supplier relationships.
Driving Revenue for Better Cash Flow
Increase Frequency of Customer Purchases:
Enhancing customer loyalty and encouraging repeat purchases are key. For startups and e-commerce businesses, this might involve email marketing campaigns, loyalty programs, or personalized offers. The goal is to make your customers choose you again and again.
Increase Average Transaction Value:
Boosting the average sale amount (aka Average Order Value (AOV)) per customer is a direct way to improve cash flow. This can be achieved by upselling or cross-selling, bundling products, or offering premium services. Understanding your customer’s needs and preferences is vital here.
For e.g., for the sample business in the video above, by increasing average transaction value by 12%, the business could create upwards of $40,000 in cash.
Cost Management for Cash Flow Enhancement
Reduce Overhead Expenses:
Cutting down unnecessary costs can free up a significant amount of cash. This involves auditing your expenses and identifying areas where you can save, like renegotiating contracts, switching to cost-effective suppliers, or adopting energy-saving practices.
Remember, the goal is to reduce costs without compromising on the quality of your products or services.
Leveraging Tools and Expertise
In our work at Think Accounting, we often use tools like the ‘Value Gap Tool’ to identify areas to improve cash flow. For instance, in the example case in the video above, by just reducing accounts receivable days from 67 to 57, a client could free up almost $34,000 in cash, freeing up that cash for to be invested in another area of the business.
This is just an example, but it shows the potential of what can be achieved with the right analysis and strategies. At Think Accounting, we’re equipped to guide you through each of these steps, applying our expertise to your unique business situation.
Next Steps On How To Improve Cash Flow
Improving your business’s cash flow isn’t an overnight process, but it’s a journey worth embarking on. Start by evaluating your current cash flow status and identify which levers you can pull to see immediate improvements. If this sounds daunting, don’t worry – we’re here to help.
You can reach out to us at Think Accounting for a detailed cash flow and improvement meeting or take advantage of our complimentary client review analysis. Together, we can map out a plan tailored to your business needs.
Conclusion
In summary, the above were some simple ways here that we can help you identify where your numbers are and help you move from where you are now to where you want to be and helping you identify which simple levers to use to help you achieve those and to get your time, mind, and money freedom.
If you’re interested in learning more about how this would look and what your numbers would look like for this, then simply reach out to us via this intake form and we will get a cash flow and profit improvement meeting secured with you or we can do it an initial complimentary client review to analyze where you are now and help map a plan for where we want to be.