As a business owner or manager, there are a number of 'levers' you need to control to successfully manage working capital and drive a successful, cash-generating business.
Cash flow is a critical part of the operation of a business.
If your business were a human body then cash flow would be the system of veins and arteries and the blood that runs through them: it's essential for keeping the body/business alive, active and functioning.
This cheat sheet contains 14 of our top tips for managing your cash flow.
'Low debt' was one of the top 3 positive impacts on business performance identified by respondents to our recent survey. In fact, over 40% of respondents cited maintaining a low debt as a key element of their positive business performance.
One of the focus areas for business owners to drive their business forward is maintaining an awareness of their capital base and liquidity for working capital and investment purposes. Critical to this is maintaining a strong cash flow.
The first step in determining the correct stock holding for your business is to understand your current Inventory Turnover Ratio (ITR) i.e. your stock turn.
As a rule of thumb, a stock holding that represents 12 months worth of sales is the maximum needed. However, it’s very hard to generalise.
Some businesses are import oriented so need to commit to a certain level of stock to ensure their freight rate is not exorbitant and/or they have sufficient stock ordered from a single season pre-order. This may cause lumps in their stock holdings.
The levers that impact cash flow and working capital are critical to running a successful business day to day, but they are also critical to building business value over time.
From a day-to-day point of view, the more cash surplus in the business, the more value in your pocket. Having surplus cash that can be used as working capital also gives your business more options to grow, invest and change.
Taking the longer-term perspective, ability to generate cash is a critical component when it comes to determining the value of the business should you wish to exit. Banks and potential purchasers will all want to assess your Business Maintainable Earnings (BME), which is essentially a measure of cash generation in the business.
When we started our eBook series one of our first eBooks focused on cash flow.
Cash Flow Management for Small to Medium-Sized Businesses was written post the GFC, because we saw cash flow management as an important success factor for our clients in managing the dynamics of their businesses in a challenging environment.
We recently completed the transaction on a business sale for a client and it served as a reminder of how important both cash flow and working capital are to the success of a business.
In particular, it reminded us how important they are to building business value and therefore, when exiting a business, receiving value from the marketplace.