Freeing up your cash flow.
Keeping cash flowing freely is essential for every business. However, there are many places that cash can 'hide' in your business and slow down cash flow. This video provides hints and tips on where your cash may be getting caught up and how to free it up to help your business operate more efficiently.
Hello and welcome to ‘Freeing up your cash flow’ – the 2nd in our Back to Business in 2021 online event series. My name is Bronwyn Lawson, and I will be your presenter for the next 20 minutes or so. The past 12 months have certainly seen some changes in business landscapes across the world. While Australian businesses are more confident now than they were 6 months ago there are still many who are struggling and still many who will not survive the pandemic disruption.
There are others though who have seen growth in their business due to the nature of their work or being able to successfully pivot. Either way, keeping cash flowing through the business is vital to be able to continue to operate … which is why we are going to have a look today at the different uses of cash in a business, how it flows through the business, where it can get caught up and how we can free it up.
As I said, my name is Bronwyn Lawson and I love my job as a Financial Educator with Westpac’s Davidson Institute. I spent many years as a lender for Westpac helping people buy their 1st car, their1st home, manage their business cash flow, grow their business, and retire comfortably. Working with these many people from varied lives gave me some great insights into financial management on both a personal and business perspective.
What I love about what I do now is that I get to share those insights with people like you. People who are actively looking to improve their own knowledge and skills and in doing so become more financially confident and independent.
Now to help today run smoothly let me fill you in on the house rules. With so many people joining us today it can be noisy in the background, so we have placed you all in listen only mode. As this is a live webinar, I encourage you to ask questions. Please type your questions into the questions panel. If you are on a computer, you’ll find the questions panel as part of the control panel probably on the right-hand side of your screen.
. If you’re on a mobile device, it will be a ? at the top of bottom of your screen to tap on. Type them in when you think of them. I will answer your questions at the end of the presentation.
We’ll also send you an email later this week with a link to a recording of this webinar. If you lose audio at any point during the webinar, please stay on the line as we will be working in the background to get back to you as soon as possible.
The final piece of housekeeping is to let you know that the information contained in this presentation is general in nature and does not constitute advice on your personal situation. We recommend talking to your banker, financial advisor or accountant for detailed information relevant to your personal circumstances.
So, as I said keeping your cash flowing smoothly and swiftly through your business is vital to support operations and growth. Today, to help you better understand your cash flow and get it moving more freely we going to look at: • What your cash position is and what that may mean for your business.
• I’m going to introduce you to, or reacquaint you with, a financial model called the Working Capital Cycle to look at the key drivers of cash in any business which, if not managed effectively, can cause cash to get caught up or even pool and hide. • Then we’re going to look at the actions we can take to help improve your cash flow.
Cash flow might be simply the money going in and out of your business, but it is vital to the continued operation of your business. You may be able to operate without profit for a while, but you cannot operate without cash. So, let’s look at a simple way to understand your cash position and what that may mean for your business.
To begin understanding your cash flow it helps to understand what is going in and out of your bank account, and what you’re ending cash position is. Start by identifying your cash inflows. Much of your cash will be received from making cash sales. However, some of your customers may be on account. That means, instead of receiving cash you gave them an invoice to pay you sometime in the future. These are known as debtors or accounts receivable.
You may have some other income, such as interest or dividend income, or maybe subsidies or grants. This also needs to be included. Once you have your inflows, you need to identify your cash outflows. These will include payments to your suppliers who can also be known as creditors or accounts payable. If you have employees include their wages and salaries. Record all your general expenses such as rent, electricity, accounting fees and all your overheads.
If you have loans, include interest and principal repayments. Don’t forget the other expenses you have, particularly the ones that happen infrequently like paying GST, Income Tax, PAYG, Super and Insurance. This is just to name the most common expenses, there may be others that apply to your business too.
Now take away your outflows from your inflows to give you your ending cash position. Once you have your ending cash position, you will have 1 of three results. Firstly, a positive cash flow. If you consistently have positive cash flow this gives you opportunities. You can opt to spend it now to take advantage of a current opportunity; you could save the cash to pay future bills or cover future negative cash flows; or you could invest the money into growing your business.
Secondly, a neutral cash flow. A neutral cash flow means you do not have to find any more money to fund your business, but it also means your opportunities to spend, save or invest are limited.
Thirdly, a negative cash flow. Now don’t panic just yet! It may only be a short-term problem. This doesn’t mean there is anything wrong with your business. All it means is you need to find the cash to cover it. You might get the cash from your own pocket, you may take on a partner who injects cash or you may need to come to a bank like Westpac and borrow the money.
Having a thorough understanding of the cash coming in and out of your business helps you to plan to ensure you don’t run short or you have contingency plans in place for when you do. But it’s not just understanding WHAT is coming in and going out, it’s also understanding the timing.
A great way to understand these timings is a financial model called the Working Capital Cycle. The Working Capital Cycle can also help highlight where cash can get caught up in your business and where the cash tends to pool or hide in your business.
Every business has a Working Capital Cycle, but they are not all the same. I am going to start out with a generic Working Capital Cycle and then I’ll talk about some variations. You start off with the money or cash sitting in your bank account. Now, your money sitting in your bank account is not doing a whole lot of work for you. You want to use that cash to make profits. To do this you first need to create or buy something that you can sell.
In this generic case you’re going to take the cash out of the bank account and go and buy some stock. The stock comes in and you fill up your store, or your warehouse or your garage at home, wherever you put this stock. Then you look to sell that stock as quickly as possible as this is now cash tied up that you cannot use for other purposes.
For some of you when you sell your stock you get your cash straight away either as cash or as credit cards, for others though, you sell on credit. You issue invoices and end up with things called debtors or accounts receivable. This is where you become the banker to your customers. What you are doing, is you’re lending your customers the money to buy your goods or services.
And, of course, you want this money to be repaid so your $ finally comes back into the business, hopefully with a little bit of profit attached.
A key measure of cash flow for any business is how long it takes for your $ to go all the way around the cycle. The faster you turn the cycle, the more cash you will have available to you; allowing you to grow more rapidly, reduce the risk and cost of using short-term debt, and potentially improve your profitability.
I said at the start of this that not all businesses are the same. The retailers out there are looking at this and saying, “I get everything in cash and credit cards. I don’t have debtors.” And, of course, you’re right. Your cycle just goes from cash in the bank to stock and back into cash. That’s a bit simpler, however the biggest killer of retailers, no matter where you go in the world, is poor management of stock. A bill comes in and can’t be paid because all the cash is tied up in the stock.
It’s important to turn your stock as quickly as possible and make sure your cash is working for you.
Others of you are saying, “Well hold on a second, I’m a service business. I don’t have stock”. And again, you’re absolutely right, however you have something that acts a little bit like stock it’s called work in progress or WIP. Basically, you take on a job from a customer, you do all the work for them, then you send out an invoice. When you are doing all that work, before you can send out the invoice, what do you have to pay out?
I’m thinking you need to be paying wages, the rent, keeping the lights on … and so on. If you are, then it is using up your cash. Then you send out an invoice and wait for your customer to pay you … more time before your dollar comes back into the business.
Whatever business you’re in, you have a Working Capital Cycle. There are of course other variations too, but it is important to understand how the cash flows through your business, so you can find where your cash is hiding, and speed up your Working Capital Cycle.
You usually measure this speed, or turns, in days. How many days on average does that stock sit on the shelf before you sell it? How many days/hours on average does it take you to complete a job for a client? How many days on average does it take you to collect your debtors? The turns are days, days are time, and time, of course, is money. Turning your Working Capital Cycle faster helps free up your cash flow.
We now have an understanding how your cash flows through your business and that if your Working Capital Cycle slows down, it can cause your cash to pool or hide instead of flowing. Now we need to work out how to get your cash flowing again. To do this we are going to look at each element of the working capital cycle - Stock, Work in Progress, and Debtors - and the actions you can take to help improve your cash flow.
A very common place that cash can get caught up and hide in your business is in Stock so let’s start there. The Stock Pool is a brainstorming tool to help you identify where you may be able to free up cash.
The Stock Pool is like a big swimming pool where all your Stock is sitting. To fill up this swimming pool with Stock you need to purchase it. So, let’s say I’ve got purchases coming in, and it’s filling up my pool, and making it bigger and deeper. How then do I empty this pool? By selling the stock. In a perfect world we would love for our purchases to arrive on the day we made our sales meaning in effect, we would just have a stream of stock rather than a pool.
But, for most of us, we’re not in a perfect world so we do end up with this stock pool. If your stock pool is getting larger and chewing up a lot of your cash, you need to start working out how to shrink it.
To shrink your Stock there are two options. You can either slow down purchases or speed up sales. Let’s start with purchases. This brainstorming tool is to help you think about how to reduce purchases and get as close to ‘just in time’ as possible.
Firstly, take a good look at your product mix and identify which items are turning over quickly, and those that are slower to move. Consider whether that slow moving stock is worth the cost of holding it. If it’s a product that brings customers to your business who then buy other stock, or if it has a strong profit margin, then it may be worth it to continue to stock it. Otherwise, look to offload it as soon as you can.
Then take a good look at your stock management system. Can you improve that system? Does it provide you with accurate and timely information? Do you do regular stocktakes and match it to the system to maintain its accuracy? Does it alert you when it’s time to order more stock or if the stock is due to become out of date?
Does your pipeline management system help you make accurate stock purchase forecasts? Particularly in highly seasonal businesses. Also, consider buying less more often. While a discount on a bulk purchase may seem attractive, is it enough to outweigh the cost of storing that bulk stock and having your cash tied up until you can sell it? A temporary solution to quickly reduce stock is to simply stop buying for a short period of time.
So, that’s a few things to consider to help reduce your stock by slowing down the inflow. The other side of the equation is to increase the outflow by increasing sales.
One way of increasing sales is to incentivise your customers to buy more by offering a discount. Another is to incentivise your staff to sell more by offering commissions or bonuses, or perhaps even additional sales training. Consider whether your marketing is effective or whether perhaps you need to try something different. You could also try packaging slow moving stock with a product that does sell well or try selling it in a different marketplace.
If none of these things are working and you’re still holding onto this stock maybe you could see if you could donate it to charity or a local school that will give you a little bit of goodwill and PR. At the end of the day write it off and write it off sooner rather than later. Even if you take a bit of a hit to your profits, most people find they then focus their attention on more profitable and cash flow positive activities.
Now some businesses don’t just buy their end-product and sell it again, they have a manufacturing or value-add element as well. In this case it’s important to ensure that the time between purchasing raw materials and having the product ready for sale is as short as possible. Some of the action we’ll discuss next when looking at Work in Progress may be helpful here as well. These are just some of the ideas for shrinking your stock pool and freeing up your cash.
Now let’s have a look at freeing up the cash that may be pooling in your Work in Progress.
Let’s have a think about this Work in Progress and how it flows through your service business. Again, we’re going to use the pool concept to brainstorm ways of managing WiP. We start out with the inputs of time and skills or, if you like, the resources needed to complete jobs. These are mainly people but could also include equipment with which you use their skills and time to complete jobs, so you can send invoices out.
What we're interested in, is having the right amount of resources to complete jobs as efficiently as possible and getting that invoice out the door as soon as possible.
You are usually paying for the time you have access to resources, if you don’t use that time you have lost that cash. So, how do we make sure you have the right amount of time and skills to complete the work needed? I believe a good place to start is to have a pipeline management system that can give you a good indication of the jobs coming up and the skills, people, functions and equipment needed to complete them.
Of course, you need to hire the right number of people with the required skills or attributes, and the right amount of equipment or space with the required attributes.
Can you use contractors, part time or casual staff instead of full-time employees? This allows you the flexibility of increasing and decreasing your resources as the number of jobs change. Do you know the capacity constraints of your resources? That is, how much work they can actually produce and in what time frame?
Ensure the work being undertaken is productive. That is, your people are working on income generating tasks, or tasks that will upskill them for future work in the pipeline. Don't get bogged down in unnecessary admin or work that’s not creating income.
Are you effectively rostering resources? This help ensure you’re not using all your expensive staff at the same time, or all your inexperienced staff at the same time. It’s about having the right mix to get the jobs completed accurately and efficiently and continuing to upskill your less experienced staff.
It’s also important to ensure you are not carrying any excess staff or equipment. This can mean some tough decisions, but this is all about making sure you keep your employees and equipment busy and occupied on revenue generating activities.
The other side to having the right resources is to ensure jobs are completed in a timely way and you can get those invoices out as soon as possible. This gets back to efficiency. What we want to do is finish every job as soon as we can. This is about making sure your processes are efficient and that your people stay motivated and productive.
Are there any obstacles or bottlenecks that are hampering completion of jobs? What’s needed to clear those bottlenecks … more time, more skills, or improved equipment? Is there a monitoring process in place so you know the progress of each job, you get early warning when they may be slowing down, and what is the ‘time to completion’?
The key to keeping all of this on track is the productivity of your staff and equipment. In a service business, it’s important to ensure you’ve enough jobs to keep everybody occupied, to keep all your capacity used, and that it is all being done efficiently and productively so that you’re getting the jobs, and the invoices, out the door as soon as you can. The better you manage this, the less chance there is of cash getting caught up in this part of your Working Capital Cycle.
Of course, the 3rd place cash can hide in your business is in Debtors. And again, we’re going to use the Debtor Pool as a brainstorming tool to help you identify where you may be able to free up cash. So, we’re thinking about debtors, like we have with stock and work in progress, as a big swimming pool. You fill it up by making credit sales and you empty it by collecting the cash from your customers.
The key starting point when offering credit sales is to consider what you credit policy is, because you are essentially lending your customers the money to buy your goods or services. Who are you prepared to lend your money to? And what criteria do they need to meet? This may mean that new customers need to establish a good track record with you before you offer them credit terms.
It’s also a good practice to find out about their payment history … just as your bank does … by requesting references or doing credit checks.
Consider too, how much you are prepared to lend, and for how long? Your credit terms could include things such as deposit requirements, progress payments, payment options, and whether you want to be paid in 7, 10, 30 or 45 days. It’s important to show all this information on your invoice so your customer knows where they stand too. Full disclosure helps ensure you get paid on time.
Help keep your debtor days down by issuing invoices the same day as you provide the goods or services. Don’t lengthen your collection period by not issuing invoices promptly. Once you have the money out there you then need to ensure you have the systems and procedures in place to collect those invoices in line with your terms.
Consider a reminder system as the due dates approach, but definitely follow-up as soon as a payment is late. It’s a good idea to follow-up in person on the phone, not just send an email that can be overlooked. The squeaky wheel gets the oil so if you’re on the phone chasing your payment, you’re more likely to get paid sooner.
In some industries the offer of a discount can incentivise people to pay earlier, but it may also pay to have a penalty for late payment as part of your credit terms. When you’re dealing with large organisations, ensure you develop a relationship with the right contact. You need to be following up invoice payment with the decision-maker not the processor. But keep them onside too so they prioritise your payment once approved.
Keeping an aged debtor listing helps you stay on top of who is paying you and who isn’t. You could also consider using an external debtor collection agency, or even invoice finance. Whatever it is, … shorter payment terms, a phone call, a discount … you want to make sure you get your cash in as soon as you can because the sooner you get your cash in the better your cash flow should be.
Taking care of your Working Capital Cycle will help the cash flow more freely through your business, helping to ensure you have cash available to operate. A key part of your operations that your cash flow contributes to is, of course, paying your creditors, including your lenders. If cash is feeling a bit tight there are a few things you can do when it comes to paying your creditors that may help too.
Take the opportunity to review your contracts and payments terms with your creditors. Research the market to check if they’re still the best supplier at the right price with the right terms for you. If there’s some healthy competition around, you may be able to negotiate a more favourable contract even if it’s only short term.
You could ask your suppliers for longer terms to pay. They may consider this if you have had a good relationship in the past or you are growing rapidly and by helping you, they will get more sales.
Keep your money in your own pocket for as long as you can. The due date is the due date - you don’t need to pay any earlier unless you are offered an early payment discount and it suits your cash flow to do so. It is always a good idea to ask your suppliers for a discount. The discount may be for early payment of invoices, for loyalty to the supplier, for volume of purchases or some other reason. You do not know if you do not ask.
With volume discounts be careful you do not adversely affect your cash flow by ordering more stock than you need.
If loan repayments are chewing into your cash flow, then it may be time to talk to your lender to see whether you can renegotiate some of your loan conditions. Repayment holidays, switching from principal and interest repayments to interest only, getting a reduction to your interest rate … even if only temporary can help you through a short-term cash flow challenge.
Bear in mind though that some of these may mean you incur additional interest costs in the future so think carefully before making changes.
Similarly, take advantage of any tax payment deferrals that may be available from the tax office. You’ll still need to pay that tax in the future, but a deferral can be very helpful in the short term.
So, throughout our time together today my aim was to help you better understand your cash flow and get it moving more freely by looking at: • What your cash position is and what that may mean for your business. • The financial model called the Working Capital Cycle which if not managed effectively can cause cash to get caught up or even pool and hide. • And finally, we looked at some of the actions you can take to help improve your cash flow.
So, that’s the end of the formal part of our presentation today, so what I’d like to do now is see if any questions have come through. So, bear with me for a moment while I check my questions panel. If you have a question that you haven’t typed in yet, now is the time to start typing. Just bear with me for a minute while I have a look at this questions panel here.
Ok, I haven’t got any questions that have come through at this point but if you do have a question that you didn’t get the opportunity to ask today then, very shortly, I’ll show you our email address where you can send your questions and we’re more than happy to come back with an answer for you.
Freeing up your cash flow’ is the 2nd in our series of live online events for Back to business in 2021. We hope you can also join us for Maximising profits and Sustainable growth over the next couple of days. Register on the Davidson Institute website, or, if you’re not able to attend on the day, the recording of the event will be available on the Davidson Institute website for a short time.
If you have any other questions but didn’t get to ask them today, then please feel free to email us at firstname.lastname@example.org. We’re more than happy to come back with a response for you. In closing, let me thank you for joining us today for ‘Freeing up your cash flow’. I trust you found this information useful and relevant and I encourage you to check out the other webinars and resources on the Davidson Institute website to help build your financial confidence.
We’d love to hear your thoughts on the webinar so there’s a short survey coming up that we’d really appreciate you taking a moment to complete. Thanks again and I wish you every success with your cash flow management. Please enjoy the rest of your day.