Cashflow

Hamish Mexted Odds & Ends

Things in Wellington feel good, and it seems like there are a lot of opportunities around. Strong cashflow could be the difference between capturing or missing out on an opportunity.

 

 The problem

If a business has tight cashflow then it’s hard to get banks on-board when an opportunity presents itself. The technical diagnosis for tight cashflow is where businesses are under-capitalised, often with slow paying debtors, high operating costs, low margins, high stock or slow job turnaround time.

The slightly less-technical diagnosis is any business where the owner lays awake at night wondering how to pay wages or keep suppliers at bay.

 

Doesn’t cash take care of itself?

It’s tempting to assume that cash will look after itself – at the end of the day if you do a good job, customers will pay on time and you’ll have enough of it.

At the same time, deliberate management of your cash will help by:

  1. Making sure you’ve always got enough cash available, when you need it (so you can jump on opportunities and avoid the pay-day insomnia)
  2. Giving hard data to make informed decisions, for example so you know the cash cost of expanding, contracting, changing staffing levels or purchasing decisions.
  3. Driving accountability to keep cash spinning
  4. Filling your sales funnel with the right number of customers without expanding too quickly.

On the face of it these might seem like things that take care of themselves if you run a successful business. At a level that’s true, but by managing them rigorously you’re able to move faster and take opportunities as they arise.

 

Where to begin

Let’s leap forward and assume you want to rigorously manage your cashflow. Based on our experience with large and medium customers in the past, here’s the process to follow:

Step One: Lending and structure review

By modelling your debt repayments, and looking at the structure (fixed/floating), you’re able to identify whether it’s sufficient for the needs of your business. For example, if you’re paying down a lot of debt, but struggling to make tax payments, then your structure could be improved. If your lending is sufficient for your needs, then you’re able to jump quicker at potential opportunities.

Step Two: Awareness of the cashflow situation

By analysing what’s tying up your cash, you’re able to develop a picture of what is really going on, exposing the cashflow situation (rather than relying on a gut-feel or assuming “she’ll be right”). Awareness of the true situation can be terrifying, but without it you can’t make informed business decisions.

Step Three: Process for improvement

Now that you know what the situation is, you enter a phase of trying to build and improve on the current situation. This involves creating a process to (for example) lower stock levels, speed up job turnaround times, or collect debtors quickly. Once you’ve build the process, it becomes a game of testing, measuring and resetting plans. This drives accountability to manage cash better.

Step Four: Sales funnel

Your sales staff will generally make enough sales to keep sufficient cash flowing in the door. That said, selective design (read more here) of the sales process will help ensure the customers they bring “a-class” customers who are the most profitable. Profitable customers mean you’re able to jump on opportunities as they present themselves.

Depending on the stage of your business (read about the Fundamentals Growth Curve here), the work resulting from the four-stage process will vary. You might, for example, need to look at:

  • Separating your securities
  • CAPEX forecasting
  • Your working-capital cycle
  • Your purchasing speed
  • Volatility analysis
  • Employee remuneration models

 

Take Action

By actively controlling your cash you’re able to take all opportunities as they arise. This means you have the freedom to choose what opportunities you take, and which ones you say “pass” to.

By not controlling your cash you could find yourself tied to your business, as if it were a job, with no clear way through it.

From here, read more about deliberate design of your business here, and about where your business sits on the Growth Fundamentals Curve here.

 

If you’d like to discuss further, schedule a free initial consultation here.