Cash Flow Is Not Your Bank Balance
Your bank balance is just a snapshot—a moment in time. Cash flow, on the other hand, is the movement of cash in and out of your business. Understanding this flow is crucial to ensuring you don’t run out of cash and always have a buffer to cover your outgoings. The concept is the Cash To Cash Cycle, you have to pay money out, then wait for more money to flow back in – the aim is to make that cycle as short as possible.
This is especially important when growing a business. An aggressive growth strategy, combined with customers taking longer to pay than agreed, can lead to a dwindling bank balance or an even bigger overdraft!
How Can You Improve Cash Flow?
First, you need to know how long it takes to get paid—your debtor days—and ensure invoices are raised immediately. Delays in invoicing only extend the time it takes to receive cash.
You also need to monitor:
✔️ How long you take to pay suppliers (creditor days)
✔️ Your stock levels and work in progress (this year, last year, and next year)
Understanding Your Cash Flow Cycle
Your business starts by buying goods and labour, often paying for them before you can sell a finished product. Ideally, you negotiate credit terms with suppliers, effectively borrowing from them until payment is due (an interest free loan).
Once materials are processed, you may have Work in Progress (WIP) and stock before making a sale. The product is then sold on credit terms, turning customers into debtors—you are essentially lending them money until they pay.
The time between buying stock and receiving payment for sales can be significant, tying up cash reserves. This cycle is known as the Working Capital Cycle or Cash to Cash Cycle, and keeping it as short as possible is key to maintaining a healthy cash flow.
Strategies to Improve Cash Flow
1. Improve Creditor Days (Supplier Payments)
✅ Review creditor days regularly
✅ Negotiate better supply terms
✅ Pay suppliers on specific days
✅ Ensure suppliers follow your process
✅ Track and record the cash flow impact
⚠️ But don’t abuse supplier relationships—maintaining a good supply chain is crucial. Avoid being put on stop or moved to pro-forma payments.
2. Improve Stock Turnover
✅ Review stock days regularly
✅ Identify slow-moving stock
✅ Find ways to convert stock into cash
Ask yourself:
- Is this stock critical to your customers?
- Can customers hold a buffer stock instead?
- Can you require pre-payments for slow-moving stock?
3. Improve Debtor Days (Customer Payments)
✅ Review debtor days regularly
✅ Raise invoices immediately
✅ Conduct credit checks
✅ Consider adjusting credit terms
✅ Chase invoices before they are due
✅ Use multiple communication methods (with scripts)
✅ Request deposits and stage payments
Tracking and recording the cash flow impact of each of these steps will help you manage your working capital effectively.
💡 Cash flow is the lifeblood of your business—keep it flowing!
If this resonates with you or you find it interesting, why not book a meeting to see what else we can do to help you?
#manufacturing #VFD #CFO #BusinessSuccess
