(1) Increase Sales,
(2) Spend Less,
(3) Reduce Accounts Receivable Days,
(4) Increase Accounts Payable Days, or
(5) Reduce Inventory Days
Which is right for you? Well, it depends on what your financial statements say.
Increase sales seems like a no brainer, but it can also mean that you need to increase space (and rent), employees (and salary and payroll taxes), inventory (more expenses) and the like. Increasing your sales can very well mean you have less cash for a while.
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?
Reduce A/R days. 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. Of course you have to pay your bills. But if a vendor is giving you 30 days to pay, don’t pay it 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.
If you want to increase your cash flow, you must start measuring. My friend Keith Cunningham (“The Ultimate Blueprint”) always says, “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.
You must have good information in order to make good decisions.