3 STEPS

TO INSTANT CASH FLOW

These four steps will help you keep track
of the money coming in and out of your
growing company.
LACK OF
CASH FLOW
IS NOT A NICE
PLACE TO BE
Lack of cash is the biggest cause of stress for business owners and for a good reasons.

Juggling payments, phone calls from impatient creditors, and your staff being paid more than you is not
what you signed on for when you went into business. Shortage of liquid asset or cash is ONE if not the
biggest cause of stress for a small business owner.

And there is a good reason for it. Juggling payments, phone calls from impatient creditors, staff moaning
about getting paid on time and even more than you is not what you signed on for when you went into busi-
ness.

o1 o2
Overdrafts up to the limit - HMRC Debt
and adittional interests from
going over.

o3 o4
Overdue creditors - with your Bank coming up with a band
supply being threatened. of red tape and not willing to
lend more.

The good news is that a business sick with the cash flow disease can be cured.

If your business is experiencing the signs of having cash flow problems dont let them mature or put up
with it any longer. Learn what you can do to make your cash flow healthy.
 THE SIGNS YOUR BUSINESS MAY HAVE CASH FLOW ISSUES

HOW CASH FLOW

PROBLEMS ARE CAUSED

Step 1

IDENTIFY THE SIGNS YOUR BUSINESS MAY

HAVE CASH FLOW ISSUES
Understanding the signs your business may have cash flow issues in detail is half-way to the cure.

The common causes for the shortage of cash in a business are:

STARTING WITH TOO LITTLE WORKING CAPITAL

Working capital is the money you need to pay for wages, expenses and loans
before your customers even pay you. For some businesses this may be as little as
10,000 for others it may be 100,000.

If you are starting up a business you also need working capital to cover you until
your sales grow enough to cover expenses.

CUSTOMERS THAT TAKE TOO LONG TO PAY

Customers paying is the source for your cash flow into the business. The more
credit you give your customers the more strain there will be on your cash flow.

Sometimes business owners are so busy they dont get time to promptly invoice
customers. Or too busy to follow up those that owe them money.
STOCK LEVELS TOO HIGH
Stock requires a balancing act. You need a reasonable amount of stock so you
have it there to meet the customers needs straightaway and make the sale.
However the more stock you have the more it ties up cash.
Stock is a cash flow drain. Now, stock that moves fast is not a problem. The slow
moving stock is the main problem as it has already been paid for.

The supplier has your money and your bank account is the poorer for it.
The business is still waiting for the money to come from the customer.

JOB CARDS THAT DO NOT CAPTURE ALL THE TIME OR COSTS

Another cash drain is not being paid for all the parts used in a job or all the labour
that goes into it. Job cards are the best tool for doing this, however while busines-
ses may record the initial parts, the adittional parts that are needed once the job
has started sometimes forgotten are not recorded.

Sometimes if there are two people working on a job the second person is not
recorded.Failure to capture the income for all parties and labour affects the profit
and the lost income never makes it to your bank account. Worse still the parts
costs do hit and reduce the bank account.

LOW PRODUCTIVITY
Salaries are most businesses biggest expense. Saving money on wages, that does
not affect the service delivery, adds big dollars to the cash flow.
Do you truly know if your staff is being productive?
Productive is very different to BUSY. People can be full of activity, but it does little
to bring dollars into the business.
A simple measure of productivity is to calculate how many pounds of gross profit is
generated for each pound spend on direct wages.

If each pound spent on direct wages generates around 2.50, productivity is satisfac-
tory.

Below 2.50 there is room to make changes and save money.

There are measures for admin wages and sales wages as well.
 CASH FLOW
TOOLS

Step 2

WHICH TOOLS CAN YOU USE TO

Simple but not simplistic cash flow tools can bring understanding and ideas on how to improve your
cash flow.

PAY YOURSELF A SALARY

The simplest tools, that often does not happen, is to yourself a salary with the rest
of the staff.
A salary is for your personal expenses.
What is in the business bank account is for business expense.

Dipping into the business account for personal expenses will lead to drawing being
larger than a commercial wage and lead to major cash flow for the business.
No matter how good the intentions, more personal drawings will come out than
you think.

CASH FLOW BREAK-EVEN TOOL

A breakeven tool tells you how much sales you need to make a month to cover all
your overheads, debts and other commitments.
it is different to a normal profit break even analysis as it takes into account all your
commitments.
The cash flow breakeven sales will be higher than the profit breakeven.
 CASH CONVERSION DAYS
Another simple tool to understand your cash flow and improve it is The Cash
Conversion Cycle.

This measures the time from starting to get a customer to when they pay. If this is
shorter cash comes into your business sooner.

The graphic below shows the components of the cash flow cycle.

CASH CONVERSION CYCLE (CCC)

A C D
Sales Cycle Delivery Cycle Biling & Pyment Cycle

B
Make / Production
& Inventory Cycle

Sales:
This is the time from when you first approach a potential custorner to when you get their signed orden.

Production/Inventory:
This is the amount of time taken to produce the product to be ready to go to the customer.
It is also the number of days inventory is held before it leaves to go to the customer.

Delivery time:
This is the time it takes for the goods to get from your premises to the customers.
Invoicing and payments: This is the time that is taken to raise the invoice and be paid.

Accelerating the cash ow cycle:

If you calculate the days for each of these and add them together thats how many days cash is tied up
in your business.
Once that number is known you can look at ways in each the days can be reduced by smart strategies.
In addition the cycle days can be reduced by eliminating mistakes, which causes delays or changing your
business model.
 CASH FLOW
LEVERS

Step 3

WHICH LEVERS TO PULL.

What areas should you focus on to get a big improvement in cash ow?
What are the levers you can pull to make a quick difference.

Gross Prot Margin

Gross profit is sales minus your cost of goods sold.
The Gross Profit Margin is the gross profit as a percentage of sales.
If this can be increased by 1% then 1% of sales goes straight to your bottom line and to your cash flow.
The Gross Profit Margin can be improved by getting better prices for your goods or raw product.
If your current suppliers wont give you a better deal, perhaps alternate suppliers will.
Look at your prices relative to the competition. There may be scope to increase your prices.

Debtors
If people pay quicker and that is sustained, there will be a permanent improvement
to the cash flow.

Providing clear payment terms, with someone regular and consistently following up debtors will bring
the days down.

Getting part or all of the price upfront before the order is made will reduce debtors and give a big boost
to cash flow.
Stock
A good stock management system makes a big difference to knowing what stock you
have, where it is, what the re-order point and number to re-order is.

Whatever money you save in stock without impacting sales goes straight to the bank account.

Drawings
Dipping into the business bank account for personal needs deprives the business of
much needed cash, if not for that day for what it needs in the coming months.

A disciplined approach of paying yourself a regular wage and a set basis for taking profits out of the
business will leave much needed cash in the business.

Key Indicators You Need To Look Out For While

Performing These Steps
There are simple measures to gain some EARLY warning that you may have a cash flow problem
coming up, before you see it in your bank balance.

We call these KPIs or Key Performance Indicators

Sales Pipeline
A sales pipe is the dollar amount of quotes that you have out with potential customers.
This KPI measures the numbers you have in the system to target.

The target pipeline amount is the amount that will deliver you your budgeted sales amount.

This takes into account your conversion rates and average time for a sale to class.

If this is below target you will know unless this is addressed you will have a cash problem ahead.
Debtors Days
These are the number of days that customers take to pay you. This should be close to
your payment terms. If it is higher you know you have a debtor problem and a cash flow
problem.

The debtors days number is calculated as debtors divided by annual sales times 365.

Stock Days
Dipping into the business bank account for personal needs deprives the business of
much needed cash, if not for that day for what it needs in the coming months.

A disciplined approach of paying yourself a regular wage and a set basis for taking profits out of the
business will leave much needed cash in the business.

Gross Prot Margin

A higher gross profit margin means that more of the money received from sales goes
into your bank account.

If your gross profit margin is slipping so will your cash flow.

Gross Profit Margin is measured as gross profit as a percentage of sales.

 THE ROLE
OF AN
ACCOUNTANT

A business focused accountant can help you through the above tools and help you with strategies to
make your cash even stronger.

Take Albert (not his real name). He is a mechanic in Devonshire with a small business who worked big
hours, but was struggling most weeks to find cash to pay the bills.

By working through a strategic budget and cash flow with Tom sales were dissected.

The ndings were that,

o1
His rates were too low: He was able
to increase them with no complaints
from his customer and added 1,500 a
month to his cash flow.
o2
The cost of sales. With an improved
cash flow he could buy fast selling
items like oils, filters etc. at a much
lower price by buying in bulk.
o3
Staff Costs: By talking through on how
to make his staff more productive his
accountant also helped him on how he
could get more work by calling on his
regular larger customers, which when
he did have time, he nearly always
came away with more work.

With his sta being more productive Tom could now call on his customers more frequently
and increase sale without extra wage costs.

By putting those gures into a cash ow forecast using specialist forecasting software, the result was a cash surplus
of $4,500 a month, up from no surplus.

An accountant who can work through your business and ask good questions will unlock strategies to improve
your cash ow in ways that you had not thought of.