There are five ways to get more cash from your business:
- Increase Sales,
- Spend Less,
- Reduce Accounts Receivable Days,
- Increase Accounts Payable Days, or
- Reduce Inventory Days
Which is right for you? Well, it depends on what your financial statements say.
Increase sales seems like a no brainer solution. In fact, it’s usually the stand-by answer when you’re looking for more cash in your business. But, it can actually create a bigger problem. More sales can also mean that you need to increase space (and rent expense), employees (and salary and payroll taxes), inventory (more cash out) and the like. Increasing your sales can very well mean you have less cash for awhile. In fact, businesses can go out of business if they increase sales too fast.
Spend less. If you’ve got a lot of frills and owner perks, maybe it’s time to reduce those so you have more cash flow for your business. It might also make a lot of sense to look at your overall operation. Have there been technological advances that make some of your processes obsolete? Can you cut costs by becoming more efficient?
Reduce A/R days. Accounts Receivable days refers to the average time it takes to collect on your accounts receivable. The faster you collect on that money, the more cash flow you will have. This could mean making more ‘for cash’ sales, taking credit cards, offering discounts or doing a better job of collection. Whatever the answer, the sooner the money comes in, the more cash flow you’ll have.
Increase A/P days. To increase Accounts Payable days means to increase the days on average you take to pay your bills. If you slow down the rate at which you pay, you will increase your cash flow. Of course, you have to pay your bills. But if a vendor is giving you 30 days to pay, don’t pay the invoice the moment it hits your door. Take advantage of the interest-free loans your vendors are willing to extend.
Decrease inventory days. Don’t order too much inventory. Keep an eye on stock. Get rid of obsolete and don’t re-order stuff that doesn’t sell. Inventory is cash all tied up and sitting there. Each of these five cash flow accelerators require two things – accurate financial statements and the ability to read them. If you want to increase your cash flow, you’ll need to make changes. What you should change and how much you change it, comes from accurately reading your financial statements.
“What gets measured, gets managed.”
If you’re not measuring your business metrics, you’re just hoping for the best when you make business decisions.