Any entrepreneur knows that a positive cash-flow is crucial to a healthy business.
While profitability can be manipulated on the balance sheet, your cash is set in stone. Investors and banks know this, and they will use your cash position to determine the true value and investment potential of your business.
There are a number of approaches that can help you implore your cash position. One of the ways you can ensure that your business is generating a positive cash flow is implementing a cash conversion cycle (CCC). A cash conversion cycle is a key performance indicator (KPI) that measures how long it takes for money spent on anything (rent, utilities, marketing, payroll, etc.) to make it through your business and back into your pocket. The goal is to get money in the bank before you need to spend it, or in other words, to generate a negative CCC.
You can influence your cash conversion cycle by changing the way your business functions in multiple areas, including sales, delivery, production, and billing and payment cycles. For instance, you can improve your CCC by collecting payments in full before production, ensuring that you only spend money when you need to.
Here are some suggestions to accelerate your cash conversion cycle:
- Analyze your cash flow and operations on a daily basis. Keeping better tabs on why things change over 24 hours and comparing your daily cash available to weekly accounts receivable and accounts payable will give you incredible insight into your business.
- Ask your customers to pay you sooner. You might be surprised by how willing your customers are if you just ask.
- If you ask your customers to pay faster, incentivize them. Offering a discount to those who pay in advance and sending friendly reminders will bring in cash faster. Plus, customers who are able to pay quicker will appreciate the value they receive in return.
- If possible, time your invoices to coincide with your customer’s payment cycles.
- Make your invoices are easy to read with all relevant information like banking details displayed prominently.
- Speed up the sales and delivery cycles. Completing projects more quickly likely means you’ll get paid sooner.
It’s important to consistently revisit your cash conversion cycle to see the impact of any changes you might have implemented, and rethink if needed. Once you have improved your cash conversion cycle, you can concentrate on optimising your cash-flow. Here are some pointers:
- Increase your asking price. If you know you’re building a competitive product, you can give it a competitive price.
- Expand your reach and sell more. You don’t have to increase your prices if you can increase the volume of goods and services sold.
- Examine your operating expenses and your supplier costs and see where you could pay less. Try to negotiate a discount or rethink your production process if necessary.
- Reduce your inventory. If you have stock on the shelves that’s not selling quickly, this will impact your cash on hand. Reducing your inventory ensures you’re only spending on materials and goods you know will sell.
Accelerating your cash conversion cycle and boosting your cash flow means putting in the time to evaluate your business processes and make the necessary changes. Employing regular accounting practices like class tracking, forecasting, and reviewing your cash flow statements will help you get the most accurate view of where your business stands and where you can improve.
If you decide to work with a team of experts, such as Outsourced CFO, we can help you examine current operations, identify any gaps, and show you where you can accelerate your cash flow and cash conversion cycles. Click here to read more about our Cloud Accounting packages, or reach out to our team for assistance.