There is a well-known saying in business: “Turnover is vanity, profit is sanity, cash is reality.”

Cash flow is the lifeblood of any business. It enables a company to pay debts, reinvest in the business, provide a return to the investors or the owner, pay expenses, fund improvements, and provide for future financial difficulties. Very simply, cash flow is the amount of money in the bank account at any one time. If it is a positive number, things are probably going well. If it’s a negative number and stays there, you are in overdraft and you need to act.

Here are some guidelines to free up cash in your business.

Where is the cash?

Analyse the amount of cash you have in the following:

Fixed assets such as property, buildings, plant, and equipment
The value of raw materials waiting to be converted
The value of finished goods waiting to be shipped to customers
The value of money owed to you by your customers, and when they last paid

Review your fixed assets

Are any assets not used or underused?
What assets can you sell off?
Is leasing an option as opposed to outright ownership?
Can you downscale to cheaper assets?
Do you have vanity investments – a glamorous office building in an expensive part of town?

Review your investment in raw materials

Have you bought large quantities of raw materials which now sit idle, to gain a bulk discount from suppliers? The future savings won’t help you pay salaries this month.
Have you bought the raw materials with cash or with debt?
What is the cost of warehouse space to store the materials?
Is shrinkage a problem? (damage, waste, theft)

Look at how you manage inventory

Managing inventory is complex. You must weigh the cost of the system against the value it will deliver. An effective inventory system should have the following:

A monthly forecast of future sales
Accurate reports on your current inventory
A system that indicates inventory received and inventory shipments, by date and value. Match this to actual inventory in the warehouse. Match to payment terms for both purchases and sales
Review inventory order levels against future demand
Keep abreast of the market, prices, supplier developments, and competitor expansions

Review your credit policy

Providing favourable credit terms to customers will help boost turnover, but it might lead to a cash crunch. If you allow a customer to pay at 90 days – you are giving them a short-term unsecured loan, and you carry the cost of that generosity. All your overheads are running while you wait for the money to come in.

Your credit policy should include the cost of extending credit
Consider giving customers incentives to pay early

Providing credit terms can make it more attractive for customers to buy from your company. Here are more aspects to consider:

Have a systematic process for reviewing and assessing credit applications.
Have a written credit policy
Keep a tight hand on bad debt. A customer who doesn’t pay is not a customer. Weed poor payers from your books
Look at speeding up and improving your invoicing and monthly statement system
Add the terms of sale on all quotations, price lists, invoices, and statements
Track the average length of time you allow credit (debtors days)
Are you insistent and firm when collecting debt?
Are your sales and admin staff fully aware of the policies and are they doing everything to get the cash in quickly?
Monitor the debt to sales ratio. Take action to keep improving.

Running a business is hard. It demands continual diligence and effort. It is even more so when times are tough. Knowing where your cash is and making sure it’s in the right place helps you to sleep a whole lot better at night.

“Turnover is vanity, profit is sanity, cash is reality.”