The 5 key levers of your operating cashflow
Last week we looked at Businessflow, more specifically, finance. This week, we are going to dissect the five levers of operating cash flow.
By focusing on these five levers and developing the right strategy for your business will allow you to improve your cash flow. Cashflow is the oxygen in your business, without which you can’t survive and grow.
You might also be interested in downloading our Cashflow Forecasting Tool here.
Without further ado, let’s investigate the five levers.
1. Sell more
Selling more is fairly simple to understand. However, it’s important to understand that focusing on selling to your target market, rather than trying to appeal to anyone and everyone, is a much more effective strategy.
Your most productive and value-creating work is for the target market you have chosen. That’s why you have to be so clear about your position.
It’s about repeat business, because you know your delivery and solution for them is optimal, and it relates to people then bringing referral business.
You must focus on your ability to bundle and create more options to sell as your business grows. This builds recurring and long-term income.
The principal decision needs to be, who are you selling to?
What is the product and/or service that you need to be championing in your marketplace so that you are attracting more repeat and referral business?
Unless you understand your position in the market with great clarity, you will be unable to grow your sales predictably. Every sale will be a struggle.
2. Spend less
This is the second lever. Again, although it sounds simple, it doesn’t just mean spending fewer dollars. You must be spending less as a percentage of sales.
This is a fundamental aspect of business activity and analysis.
This is about common sizing, so that you can compare figures accurately.
All expenses must be measured against sales as a percentage. All sales and cash out items are measured against sales, therefore you are measuring trends over time and they can be accurately compared.
This allows you to work out where you are getting better or worse in your organisation, and to be in a position so you can press the right lever and make better decisions.
Converting every dollar amount to a percentage of sales helps you to be more productive with fewer resources, which leads to more profit.
It’s about utilisation and the relationship between the decision to invest and the sales outcomes.
How do you ensure you are running a business that is lean, that you are not ‘pimping your ride’?
You must constantly be reviewing cost-to-revenue.
If you are building a Productivity Diamond, you are constantly having A-graders produce A-grade results. To do this, you must know the numbers.
Something might cost you $200,000, but that’s not the important figure. What is that costing you as a percentage of revenue?
Spend less, but as a percentage of revenue, not as a dollar figure. If the dollar figure goes up, that’s okay if it drives a bigger increase in revenue. No one gets rich just by cutting expenses.
3. Reduce accounts receivable days (debtors)
Your productivity can be boosted through much more efficient and effective terms of trade systems.
It takes good people, strategies and systems to deliver that.
You must have firm and clearly defined rules of the game.
Your terms of trade conversation with your clients has to be very clear and you must set the expectations upfront.
If your finance department needs to be more productive, you must provide a terms of trade platform that they can use.
If you don’t have a system and structure for them to follow, your accounts department will not produce the results you’re after.
Your finance department must be okay making the hard phone calls and chasing debts and they can’t do this without good systems in place.
I’ve seen this send businesses to the wall if not handled well.
To build a good working relationship with your debtors you – or somebody in your finance department – must speak to them regularly.
You must build relationships with the person who pays the accounts.
You must also stop dealing with people who don’t meet your terms or who are slow payers.
If they are having problems, look for ways to work with them. If they don’t have enough cash in the bank right now, such as paying by credit card or setting up a line of credit.
But, if they are still giving you trouble, it might be time to cut them loose.
A client is only of value to you if they are putting money in the bank according to your plan and mutual agreement.
If you are loose with your systems, you spend time chasing money and then your team is not being productive.
4. Reduce inventory days
How do you effectively sell your inventory in quicker timeframes? This is what this lever is all about. How do you move it faster, and move more of it?
You must measure your inventory and understand your utilisation. You must understand the relationship between productivity and return on assets.
Monitor your wastage for products and time. Monitor your shrinkage.
If you are going to get more productive here, it’s in inventory. Even the people and time are inventory. It’s not difficult, it’s about discipline and measurement.
It doesn’t happen overnight, but you must be conscious about it at all times.
Your ability to turn inventory over quicker and use time more productively is key to your ability to get more profits quickly.
Whether you are selling products or time, you must make sure you are turning over that time or product more regularly.
This is called stock turn. Some people think this only applies to products but not services. Think again.
If you are selling a service you need to be more efficient and effective in using your time.
When selling products, turning stock over more regularly is critical to long-term cash flow growth.
How do you increase your stock turn, whether that applies to products or services?
First, understand the power of utilisation of assets, and how many sales you get from your assets.
Negotiate with your suppliers and tell them that your business is growing. You can then renegotiate your terms, and as your organisation purchases more products from your suppliers, so you are in a more powerful position in terms of negotiation.
You must take advantage of this. You must also keep an eye on who else is out there so that you know whether you are working with the best suppliers.
Talk to new suppliers who are aggressive in seeking to do business with you on your terms.
5. Increase payable days
This is one of the easiest business strategies you will ever come across. It is as simple as paying your bills when they are due.
Not a week before or a few days before. When they are due.
I see too many businesses that have no structure for the payment of their bills. They have an ‘in’ tray, and every few days somebody pulls out a pile of bills and pays some that are due anytime in the next week or so.
But why would you do this? You want your money in your bank account – not your suppliers’ – for as long as you can.
So, create systems within your business that ensure bills are paid on the day they are due.
You should also try to negotiate longer payment terms with suppliers; again, you’ll be in a stronger position to do this as your business grows.
It’s important to build a rhythm in your business.
Paying once a month is ideal if you can agree these terms. From your budget perspective, if you confirm that with your suppliers and you meet this payment that’s great.
Make sure you are optimising ALL five of these levers.
If you need more guidance on any of these areas, reach out. We are always happy to help!
Next week we explore the other part of Businessflow – Operations.
Power to you!
CEO, Business Benchmark Group
Looking for a business coach? Find out more about the Board of Directors 12 Business Coaching Program.
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