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Straight-forward steps to improve your business cashflow


Poor cashflow is the biggest killer of promising startups and SMEs. Here, Alan Sharfman outlines some simple steps you can take to improve you cashflow situation.

As a finance professional, I am often approached to assist my clients with a cashflow solution. Now while I do not profess to be a magician, often some simple yet practical steps are required to make significant changes in the way a business manages its working capital and, more significantly, its cashflow.

When directing my clients on the planning of their short and long-term funding requirements, I always stress the importance of forecasting likely cash requirements rather than projecting profitability. In fact, every business owner should not only measure results via financial statements but should also ask the critical question, “Where is the cash?”

Cash fuel drives you in business, just as jet fuel keeps a plane aloft. A pilot is very careful to accurately predict the fuel requirements. You should place the same importance on cashflow control because, if at any point in the future you run out of fuel, you’ve got a big problem.

The first step to boosting cashflow

So what methods should be applied to improve cashflow liquidity so that business debts can be paid and cash surpluses secured? Well, your finance professional will, in most cases, correctly project changes in balance sheet accounts together with detailed income statement movements to show expected cash positions. In fact, your smart accountant might even build some surpluses in your budget for unforseen events and split investing and operating activities from financing activities. This is great accounting and it’s wonderful to track your forecasted cashflow against actual results. This discipline can be performed weekly, monthly and yearly — a great business tool to help management/business owners make prudent decisions.

How else can you improve your business’s cashflow?

Are your customers paying their invoices on a timely basis?
Are you extending payment terms to ensure customer retention and thus financing your company’s growth?

While most businesses would like to achieve high sales and customer volumes, extended payment terms could be detrimental to cashflow.

It’s more than likely that the product cost has already been met by the business and is thus financing the purchase of these goods. Thus, when payment is received in arrears of its due date, cashflow pressure is created. The sale is reflected in the profit and loss, but where is the money? Am I going to receive payment this month? Next month? Worry, worry.

While not all clients will pay cash for purchases, a clear and rigid collectables system needs to be in place. The lesson here is not to burn your cash in support of customer retention

Are you paying your bills immediately and not taking advantage of your due dates or the simple management of extending your due dates as and when is required?

Good cashflow practice should only allow for the payment of purchase invoices on their due dates. If financial constraints are preventing this from taking effect, manage those creditors who could extend your terms. I have always followed the motto of paying yourself first and then pay your creditors.

Did you purchase capital items such as equipment and fixed assets outright?

If the business used cash to purchase fixed assets, this cash outflow will not be reflected in your income statement and hopefully has been budgeted for in your balance sheet. Options are available for capital expenditure in terms of finance leasing, operating leases, etc., but the future cash effect of such purchase would need to be analysed from a cost-benefit point of view.

Do you have more stock than you can sell within several normal sales cycles?

Your cash outlay in stock might be too aggressive and you could have slow moving or obsolete stock items. Stock requirements need to be strictly managed based on demand as much as supply. If stock turnover is at lower rates than previous years, the amount of stock on hand needs to be reduced. A great financial indicator to manage stock levels is comparing gross profit percentages (Sales – Cost of Sales) from previous years and months.

Could you possibly have theft or internal losses?

I am of the belief that senior management and SME business owners should be signing off their monthly bank reconciliations to have a hands-on feel as to the monthly movement of cash. Also, appropriate security controls should be in place to effect bank payments, receipts of money. Often two signatories and authorises are a good control to ensure cash control is not only in the hands of one individual.

These tips and a strong internal reporting system are critical factors in cashflow management. The objective here is to simplify your cashflow strategy to make your cash king.

Alan Sharfman is Principal of iDeal CFO Solutions.

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