The Procrastination Penalty
(Part 3 – Cash Flow)
As explained in a previous chapter, we are looking for incremental gains. Those gains come from a myriad for places within your business and all add up to significant increases to the bottom line when compounded. It is not unusual for a business to see a 3-4X increase to the bottom line within six months depending on how hard, how fast, and how diligent the Owner works at it.
How is a 3-4X bottom-line increase possible without a 3-4X increase in sales you may ask. Well, let’s look at an example of a simple improvement plan:
- Present Sales = $1,000,000
- COGS (Cost of Goods) = $500,000
- Present Bottom-line profit = 5% = $50,000
- ———————————————————-
- Increased Sales = 10% = Increase $100,000 = $5,000
- Price Increase = 5% = $50,000
- Gained Efficiencies (Reduced COGS) = 5% = $25,000
- Reduced Scrap (Reduced COGS) = 5% = $25,000
- ———————————————————-
- Total Bottom-line After Initiatives = $155,000
These 4 simple initiatives increased our bottom-line by more 300%, however we have not factored in compounding. After we increased sales by $50,000, we have additional savings:
- Another $5,000 for the Price Increase on the additional sales
- Another $2,500 for the Increased Efficiency on the additional sales
- Another $2,500 for the Reduced Scrap on the additional sales
- ———————————————————-
- Total Bottom-line After Compounding = $10,000
Bringing our bottom line from $50,000 to $165,000 with 4 simple and conservative increase/savings projections.
Now, how does this relate to “cashflow”? Technically these improvements are more about profitability than they are about cashflow, but I will contend that with enhanced profitability cashflow becomes less and less of a problem. And the sooner one starts these or other profit improvement initiatives the greater the gain, cashflow problems disappear, and the sooner you can dig in on more improvement initiatives.
But let’s address cashflow directly for a moment. Improvements to just-in-time inventory purchases, decreasing throughput time from purchasing raw materials and payroll investment to the actual sale of the product or service, and expedited employee layoffs (when appropriate) will enhance cashflow significantly. Doing them sooner rather than later has it obvious benefits, and therefore should not be delayed.
I would be remiss if I did not speak to Accounts Receivable. Accounts Receivable is an asset that you can’t spend until you reel it in. When cashflow is an issue, you must spring into action and address outstanding receivables immediately. You may want to consider changing your “payment terms”, or you could call and offer discounts on early payments if you truly need cash now. You can put a couple people to work for a week or two to do their best to collect, or you can sell your receivables if you are truly desperate. And if all else fails you can turn them over for collection.
Cashflow is usually a temporary condition, part of the ebb and flow of business cycles and seasons. However, if you are experiencing cashflow issues consistently then something is broken in your business model, and immediate analysis is necessary to determine how to turn things around. I will caution you that thinking “more sales” is the answer is usually the wrong solution and only a partial solution at best.
For proof of this I direct you to look at the numbers above and see that even though we increased sales by twice the percentage than the other increases, it was one of the smallest contributors to the bottom-line.
Enhancing cash flow is essential for maintaining financial stability and ensuring that your business can meet its obligations, invest in growth, and navigate uncertain periods. This article would not be complete without a laundry list of what you can do to enhance your cashflow, below are some effective strategies:
- Improve Receivables Management
- Invoice Promptly: Send invoices as soon as goods or services are delivered to minimize delays in payment cycles.
- Offer Early Payment Incentives: Provide discounts for customers who pay early to accelerate cash inflows.
- Set Clear Payment Terms: Establish clear, short payment terms (e.g., “Net 15” instead of “Net 30”) to reduce the time customers take to pay.
- Follow Up on Late Payments: Implement a system to follow up promptly on overdue invoices, using reminders and, if necessary, collection agencies.
- Control Payables
- Negotiate Payment Terms: Work with suppliers to extend payment terms or set up installment plans to delay outflows without incurring penalties.
- Prioritize Payments: Pay critical bills like payroll and utilities first, while delaying less critical expenses.
- Take Advantage of Discounts: If you have strong cash reserves, consider paying early to take advantage of supplier discounts.
- Optimize Inventory Management
- Reduce Excess Inventory: Holding too much inventory ties up cash. Use demand forecasting to maintain optimal stock levels.
- Adopt Just-In-Time (JIT) Practices: Only purchase inventory as needed to reduce storage costs and free up cash.
- Liquidate Unused Stock: Sell off obsolete or slow-moving inventory at a discount to generate immediate cash.
- Increase Revenue Streams
- Upsell or Cross-Sell: Encourage customers to purchase complementary products or premium services.
- Expand Offerings: Introduce new products, services, or subscriptions that align with customer needs.
- Improve Pricing: Adjust prices strategically to reflect market demand or add value without deterring customers.
- Streamline Operations
- Reduce Overhead Costs: Audit expenses and cut unnecessary spending (e.g., unused subscriptions, energy inefficiencies).
- Automate Processes: Use technology to automate repetitive tasks, saving time and labor costs.
- Outsource Non-Core Activities: Focus resources on core business areas by outsourcing functions like IT, accounting, or marketing.
- Adjust Payment Models
- Subscription Plans: Implement subscription-based pricing to generate recurring revenue and stabilize cash flow.
- Upfront Payments: Require partial or full payment upfront for services or custom orders.
- Installment Options for Customers: Offer payment plans to customers for high-ticket items to encourage purchases while maintaining cash flow.
- Leverage Financing Wisely
- Short-Term Loans: Use short-term loans or lines of credit to cover temporary cash flow gaps.
- Invoice Financing: Sell outstanding invoices to a factoring company for immediate cash.
- Business Credit Cards: Use credit cards strategically to cover expenses but pay off balances promptly to avoid high interest.
- Manage Tax Obligations Efficiently
- Take Advantage of Deductions: Work with a tax advisor to ensure you’re claiming all eligible deductions and credits.
- Defer Payments: Where possible, defer tax payments to keep cash in the business longer.
- Plan Quarterly Taxes: Avoid surprises by setting aside funds for quarterly tax payments.
- Strengthen Customer Relationships
- Encourage Repeat Business: Build loyalty through excellent service, loyalty programs, or exclusive discounts for repeat customers.
- Focus on High-Margin Products: Prioritize the sale of products or services with the highest profit margins.
- Customer Retention: Retaining existing customers is often more cost-effective than acquiring new ones.
- Regularly Monitor Cash Flow
- Use a Cash Flow Forecast: Create projections to anticipate inflows and outflows, helping you plan for potential shortfalls.
- Track Key Metrics: Regularly monitor metrics like accounts receivable turnover, inventory turnover, and days payable outstanding.
- Plan for Seasonality: If your business has seasonal fluctuations, build a cash reserve during peak periods to cover leaner months.
- Partner Strategically
- Collaborate with Suppliers: Negotiate discounts or bulk deals with suppliers to lower costs.
- Form Partnerships: Collaborate with complementary businesses for co-marketing or bundled offers, which can increase sales.
- Leverage Vendor Agreements: Renegotiate existing contracts to secure better terms or discounts.
- Build a Cash Reserve
- Set Aside Profits: Allocate a portion of profits to an emergency fund for unexpected expenses or slow periods.
- Invest Wisely: Place cash reserves in liquid, low-risk investments to earn returns while keeping funds accessible.
Once the doors of your business are open, time is money. By implementing these strategies sooner rather than later, you can strengthen your cash flow, ensuring your business remains financially resilient and well-positioned for growth opportunities.
Every Tick of the Clock will Cost a Business Real Money
1,300
