We can all agree that cash is the king, for sure. But, can we say that the cash flow is the safeguard of a business?!
The cash is only one side of the coin. On the flip side having positive cash flow and enough cash on hand for dealing with unexpected expenses and inevitable investments at a certain point in time is crucial for business survival. The business positive cash flow is often considered a key indicator of its potential long-term success. The business may have all the revenue in the world, but without the ability to generate sufficient cash of its operations, timely, it can easily fail.
What’s the right cash flow management strategy for my business?
Answering this question will take far more time than you expected. And there is no only one answer to this question. Because, the answer given now, may not be applicable in the future. The answer needs to be an evolving one, as the economy is evolving, as the business is progressing, as the environment is changing, as the technology is innovating. In one sentence, the change is constant, but the cash flow management strategy shouldn’t be.
Having said that, incorporating change in every aspect of a business is inevitable, especially when it comes to financial decision making regarding the cash flow. Incorporating change timely and being resilient to change gives your business a competitive advantage on the market.
The three main pillars of a strategy for maintaining positive cash flow:
- Short-term: Boosting liquidity.
- Mid-term: Cutting expenses and reallocating resources.
- Long-term: Investing in a competitive advantage of your business.
I. To grow short-term, or near-term positive cash flow, change the pricing models, and experiment with a changed revenue stream. You can go from a generous to aggressive approach with your customers. Examples are:
- Ask for a deposit from your customers or advanced payments. Agreeably this will be a generous move by your customers, and not all will be willing to accept this request but you won’t get what you don’t ask for.
- Change the payment terms for your customers. Ask your customers to pay the invoices faster, offering a discount in exchange for the payments received within 10 days, for example.
- Sell your invoices i.e. try with invoice factoring, as a quick form of business funding. The cash is locked in the invoices until the customer pays. With factoring, the invoices are sold to the factoring company and cash is collected upfront.
II. To maintain mid-term liquidity, you need to cut expenses and reallocate resources:
- Arrange new and more favorable payment terms from your vendors to delay your expenses. Again, you won’t get what you don’t ask for. Getting the extra two weeks will prevent potential delays in the salary.
- Sell your purchase orders to a financing company. Get the materials from your large order faster, and pay to the financing company later than the initial due date set by the vendor.
- Use lower cost inputs to deliver the same services or products, and/or cut some of the unnecessary costs for good.
III. In the long run, the cash flow will always be affected by the competitiveness of the business on the market. Since running a business is a marathon, not a sprint race, you will need to learn how competitive advantage works, and how to leverage your potential over competitors. Your competitive advantage can be:
- Your highly skilled labor,
- Your unique product or service,
- Your access to new technology, etc.
Identify what your advantage is and reallocate your resources towards your competitiveness. Invest your free cash wisely.
Remember, with cutting the expenses and changing the pricing models for your customers, you are increasing the margins that will help a business spin-off more cash which can be used to fund operations. So, all these cash flow management changes will only make sense when the resources are allocated cautiously and invested properly.
Warren Buffett says: “Price is what you pay. Value is what you get.”
Always have in mind this quote while dealing with cash and making short and long-term plans for your business cash flow. Always be willing to invest in knowledgeable decision making now that will lead to better cost-effectiveness in the future and higher long-term market competitiveness. Utilize the values you get for the prices you pay. Act now, but always think for the future.
“Build a castle, not just walls!”
“A man came upon a construction site where three people were working. He asked the first, “What are you doing?” and the man replied: “I am laying bricks.” He asked the second, “What are you doing?” and the man replied: “I am building a wall.” As he approached the third, he heard him humming a tune as he worked, and asked, “What are you doing?” The man stood, looked up at the sky, and smiled, “I am building a castle!”