Improve Business Cash Flow and Boost Productivity
Whether you’re bootstrapping a start-up or conscious of costs, a few productivity improvements can make a big difference to your bottom line, especially if it’s difficult to immediately increase revenue.
Identifying problems with your spending and income levels is easier if you can track gaps in your systems and processes that may be putting pressure on your cash flow. If you’re constantly patching cash-flow holes, it’s not a productive use of your or your team’s time.
Some common culprits include:
- A significant customer who never pays invoices on time, creating cash-flow pressure and potentially affecting your ability to meet your own obligations. Stricter credit control procedures, clear trading terms and prompt debt collection can help.
- Rising production and operating costs can erode profit margins. Sourcing cheaper suppliers only works for so long. Regularly monitor your gross profit margins and review pricing, efficiency and customer demand before margins deteriorate significantly.
- Develop productivity metrics to monitor key performance indicators (KPIs) such as revenue per employee, labour utilisation, customer acquisition cost or conversion rates. The most useful KPIs will depend on your industry and business model.
- Business growth is positive, but rapid expansion often brings additional fixed overheads such as management, administration and compliance costs. Regularly review profitability to ensure growth remains sustainable.
- If sales are slower than expected, you may need to review your strategy, target market, sales process or overall business viability.
- Events beyond your control, such as supply-chain disruptions, the loss of a major customer, economic uncertainty or unexpected capital expenditure, can put pressure on finances. Diversifying customers, suppliers and revenue streams can reduce risk.
Taking a proactive approach to identifying these issues will help you pinpoint inefficiencies before they escalate and drain time and resources from your business.
Forecast Your Cash Flow
One of the most effective ways to manage cash flow is to maintain a rolling cash-flow forecast.
Forecasting expected income and expenses helps identify potential funding gaps before they become critical. Include expected customer receipts, wages, operating expenses, GST obligations, PAYG withholding, loan repayments and other regular commitments.
Regular forecasting gives you more time to take corrective action and make informed business decisions.
Free Up Cash Where You Can
Before seeking financial support from external sources, focus on freeing up money from within your business. You may be surprised by the difference small changes can make:
- Sell underused assets. In some cases it may be more cost-effective to rent or lease equipment as required.
- Downgrade, replace or lease vehicles to preserve cash reserves.
- Track expenses carefully and eliminate non-essential spending.
- Improve inventory management and aim to hold only the stock required to service customers.
- Review existing debt facilities. Refinancing may improve cash flow in some cases, but assess the total cost of borrowing, fees and repayment obligations before making any decision.
If you can free up cash internally, you’ll improve liquidity and reduce reliance on external finance.
Collect Your Money Faster
Invoice promptly and offer convenient payment options. Many accounting systems now support online payments, automated reminders and mobile payment solutions that can shorten collection times.
When negotiating new contracts, consider payment terms that support cash flow:
- For large contracts, negotiate deposits or progress payments linked to agreed milestones.
- Include regular payment dates as part of your agreement.
- Clearly define milestones and deliverables to reduce the risk of disputes.
- Carefully manage how much credit you extend and to whom.
Improving debtor management is often one of the fastest ways to strengthen cash flow.
Collaborate
Working with other businesses can help you stay within budget and increase efficiency by sharing resources, people, ideas and capacity.
The arrangement can be:
- Formal, such as a contractual agreement.
- Informal, where businesses refer work to each other.
- Long term, such as sharing suppliers or customers.
- Project based, where businesses collaborate as needed.
Collaboration can help you:
- Divide tasks based on strengths and expertise.
- Make faster decisions through shared knowledge and feedback.
- Generate new ideas and innovative solutions.
- Access new products, services, customers and markets.
- Reduce costs through shared resources and purchasing power.
- Increase capacity to bid for larger contracts.
- Strengthen supplier relationships.
- Outsource activities instead of investing in additional infrastructure.
- Explore new business models and sales opportunities.
Before entering any arrangement, ensure responsibilities, confidentiality obligations and commercial terms are clearly understood by all parties.
Raise External Funds Wisely
You may have successfully funded your business to this point, but there may be times when additional capital is needed.
Potential sources include:
- Crowdfunding.
- Angel investors.
- Venture capital.
- Strategic business partners.
- Government grants and support programs.
- Business incubators and accelerators.
Before seeking funding, ensure you have a clear business plan, realistic forecasts and a strong understanding of your cash-flow requirements.
Next Steps
- Identify improvements that can create incremental gains in productivity and profitability.
- Implement or update a rolling cash-flow forecast.
- Review customer payment terms and collection processes.
- Look for opportunities to collaborate with businesses that complement your capabilities.
- Investigate funding opportunities only after optimising the resources already available within your business.
Talk to your accountant or business adviser if you’re considering significant operational, financing or growth decisions.