You probably know the old saying ‘Turnover is vanity, Profit is sanity’. It’s true of course, and I like to add the extra line ‘and Cash is King’. After all, the purpose of any business is to generate cash for its owners, isn’t it? If it’s not doing that then something needs some attention fast.
Any business that is growing can rapidly generate a healthy appetite for cash for all sorts of reasons – marketing, people, raw materials, equipment. So keeping a careful eye on cashflow will be critical to success.
Even for a business that is not growing fast, it’s amazing how quickly some small changes in different elements of the business can combine to create a big change in the business’s ability to generate cash.
With any business where cashflow is a concern, I always tend to view it as the symptom of a problem, rather than the cause. Just as with our own health, treating the symptom might make us feel better for a while but it won’t remove the cause of the pain! In a business, increasing the overdraft, factoring the invoices or stretching supplier payments may help for a while but if there is an underlying problem you can be sure that it will rear its ugly head again before long.
To help you focus on the opportunities to improve your cashflow, you could do any of these six things:
- Reduce your debtors (customers who owe you money)
- Increase your payment terms with suppliers
- Reduce your stock levels
- Increase your profit margins
- Reduce your overheads
- Sell more
Or you could do several of them, couldn’t you?
In the immortal words of the Meerkat – ‘Simples’.