How to Improve Cashflow Acceleration

A healthy cashflow is a major contributor to your business’s ability to survive and grow. Do you want to harness the power of your cashflow to grow your business?  Are you struggling to pay bills when they fall due? Speeding up cashflow can help with both these goals. Cashflow Acceleration discusses how you can accelerate your cashflow to improve the health and growth rate of your business. Yellow Belt 

Cashflow is the vital “life blood” of any business.

Cashflow:

  • Determines the businesses longer-term financial viability.
  • Has a significant impact on the rate at which the business can grow.
  • Is one of the most important aspects of good company management.

Poor cashflow is one of the main reasons businesses fail.
It is not only small businesses that fall victim to this problem.
Big business can also slide into poor cashflow management leading to ruin.

Choice Between Monitoring Cashflow and Profit

Many people confuse cashflow and profit and think they are similar; but they are not.

Cashflow is a far more important measure than profit.
Go to the article: Learn Why Cashflow Beats Profit to read more

The calculated ‘profit’ may not have much reality to the owner/operator down in the trenches.
Cash is either present in your bank account or not. It is an indisputable measure of your businesses ability to survive and thrive.

Being practical business people:

  • Leave the calculation of Profit to the accountants.
  • Rely on the estimation of Cashflow.
    • You will get reassurance that your business can pay its debts as they fall due and has the ability to grow.

How to Eat an Elephant

Speeding up all aspects of your Cashflow Acceleration at once may prove to be too much of a challenge.

Is your business large enough to have several departments?
Each department can work in parallel on the 4 components of Cash Accelerator.
Form teams if input is required from more than one department.

Is your business a small company? 
Managers and staff will need to pace themselves over the 4 components.

In either case, set yourselves a quarterly goal to work on in the Cash Accelerator process.

The Cashflow Model spreadsheet (available for download in the 12Faces KnowledgeBase - coming soon):

  • There are various elements that you can change and you can "Model" the results of making these changes.
  • As you make a change, you will see the percentage change under the Impact Column (Column F).
  • Apply 80/20 thinking and work down a list of things that can be done in order of their impact.
    Go to the Skills Module introduction: SM2.0: 80/20 Sales Growth; Double Sales, Triple Profits

Choose a major topic to work on (e.g. price increase):

  • List the various ways that you think you can increase price.
  • Sort them by their likely impact on the rate of change.
  • Apply 80/20 thinking to do those with the largest impact first, where that is feasible.

What improvement are the changes making?

  • Considerable improvement - keep going.
  • Small improvement - determine if the time and effort involved is worth the change. If not it is time to focus on another area of your business.

Incremental business improvement is known as Kaizen.

Kaizen:
Business-wide attention to incrementally improving the areas of your business which will have the greatest return from the application of time, money and other resources.
Go to the article: How Kaizen Leads to Continuous Incremental Improvement..

Not familiar with Kaizen:
Start with small / simple improvements from the following lists. Get some quick successes to build your confidence.

Familiar with Kaizen:
Apply the 80/20 rule via the discoveries you made using the Model spreadsheet mentioned above.
Work on your major contributors first.

Are you getting more successful at ‘eating your elephant'?

  • The bottom line is that you see more money in your bank account. A more measurable tool is the Cash Conversion Cycle metric (see the link below).
  • It will give you an estimate of your cashflow efficiency at a particular point in time.
  • Plot the data over time (say monthly to start then quarterly),
  • This will give you a clear impression of any improvement or deterioration.

Accelerating Cashflow

You have decided to increase the rate of your cashflow.
There are 4 areas where the Cash Conversion Cycle (CCC) can be accelerated.
Go to the article: How to Benefit from Cash Conversion Cycle (CCC) for more details

These are:

1. The sales cycle:
Ways of making the sales process faster to generate cash faster.
Go to the Diagnostic link: I Don't Know What is Wrong to read more about Sales

2. The workflow cycle:
Reduce the time it takes from raw materials entering your business until the point of delivery to your customer .
The customer is billed earlier and your cash recovered faster.
Go to the list of articles on workflow here

3. Accounts Receivable and Accounts Payable cycle:
Send bills out as soon as possible.
Follow up Accounts Receivable outstanding.
Get the cash owing as soon as possible.
Go to the article: How to Boost Your Accounts Receivable and learn 15 ways to improve your Accounts Receivable cycle.

4. Inventory and Work in Progress:
This is the process of streamlining your production cycle as much as possible.
Reduce the amount of cash tied up in Inventory (raw materials and completed work) and Work in Progress (WIP).
Go to the list of articles on Inventory and Work In Progress here.

Activities to Improve Your Cashflow

Following are a host of activities that you could do to improve your Cashflow.
Select the ones that are applicable to your business.
We refer to articles within 12Faces that cover the topic in greater detail.

Accounts Payable

To improve your cashflow, you want to pay your suppliers as slowly as is reasonably possible.
Go to the article: How to be a Cashflow Wizard to learn how Amazon and Dell Computers use this method to fund their blistering growth.

Monitor your Cashflow carefully.
This will ensure that you have money available to pay your suppliers and other expenses eg. Wages and Tax.
Go to the Skills Module introduction: SM6.0 Profit Autopilot - Introduction to learn about this amazing skill.

Synchronising Company Expense

Is your billing cycle for your customers aligned with the billing cycle of your suppliers?
Does that cycle align with the payment of your Operating Expenses?

For example: Wages.

  • You bill your customers monthly.
  • You pay your Salaries weekly.
  • It will take at least 4 weeks to get the cash that you need for your Salaries.
  • You run the risk of always being short of cash.

Speed up your cashflow
Try billing your customers and paying your staff each fortnight.
You will have income coming in at the same frequency as one of your largest expenses goes out.

For example: Billing cycle

  • Synchronise your suppliers billing cycle with the billing cycle of your customers.
  • Don't pay your suppliers in a faster cycle than your customers are paying you.
  • If you do, you will outlay money with your suppliers before you receive it from your customers.

Go to the Skills Module introduction: SM6.0 Profit Autopilot - Introduction to enrol in this skill