18 Mar 10 steps you can take today to improve your cash flow tomorrow
“Business opportunities are like buses, there is always another one coming.”
Know your numbers
The best business leaders are able to describe their business, market and future plans numerically.
Exceptional growth comes from precise understanding of all aspects of your business, including key metrics such as sales funnel health, compound annual growth rate and gross margins, and the status of current resources such as cash. I am not suggesting you divest yourself of all emotion or passion, but rather complement it with objectivity.
Embrace low-cash growth strategies
Often a company in growth mode will get a rude awakening when the sales plan actually succeeds, only to discover cash consumption, for working capital, can vastly outstrip cash generation. It’s one of the better problems to have, but don’t let it become fatal. Build low-cash growth strategies up front such as non-core outsourcing, well-negotiated deal terms, low-cost technology platforms and scalable, multi-channel business models.
Maintain control of your company’s financial systems at all times
Build strong and robust financial systems led by competent and trusted financial managers. Never, ever lose control of your financial systems. When in growth mode, review your financial statements frequently (monthly) and your cash position weekly. Audit your systems regularly and keep a constant lookout for incompetence, deception and fraud. Leave nothing to chance here.
Deeply understand your sources and uses of cash
If your understanding of accounting is weak, get up to speed fast. Learn how cash flows in your accounting system, and what drives cash generation and consumption. If you don’t know much about cash flow, research, cash flow optimisation explained, to help you learn more. For instance, if revenue increases, but accounts payable or inventory increases to service that revenue, cash will initially be consumed, not produced. You run the business, not the accountants.
Be fanatical about improving margins
Top-line growth must be converted into cash through effective margin management. Know your margins to one decimal point, set targets for each product and sector, cull the lowest 10% margin customers per year, and constantly test and iterate your offers to improve future margins.
Manage company working capital well
Run an aggressive accounts receivable strategy (i.e. prepayment, large deposits, automated billing and improved collections) and mitigate payables. Work strategically to reduce working capital through new business models and outsourced fulfilment.
Play cash offence by driving sales
Start by selling more of your current offers to existing customers, then new offers to current customers, and finally develop new offers to sell to everyone. Selling more to your existing base is one of the best ways to juice up cash flow, since it requires modest new investment and can be ramped up quickly.
Play cash defence through cost containment
Implement a system such as Lean, which focuses on the functions that deliver value directly to the customer. Invest in those steps and massively reduce the non-value-added activity and waste. Reduce discretionary spending by creating a culture of frugality and always ask, “How will the customer benefit from this expenditure?”
Be ROI driven
Focus all your key investment and time in the areas that will give you the biggest cash return. This usually starts with more sales, so as CEO you should be spending 50% of your time on sales. Also invest in hiring employees who create value for the customer, restructuring processes to reduce cost or cycle time, and new capital projects that build future cash streams.
Use cash to dominate your sector
Use your newly minted cash to dominate a sector, not just compete in it. Sectors with too much competition will drain cash resources. Do this by regularly reviewing your strategic growth options and ensuring cash is diverted to the most promising areas. Don’t get complacent with the status quo and invest strategically to dominate.
Eamonn Percy is the principal of The Percy Group, a business advisory and capital firm focused on helping business leaders of mid-sized companies accelerate the growth of sales and profit. Subscribe to his newsletter at www.percygroup.ca.
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