How do successful businesses deal with cash flow?

Successful business owners seemingly have one thing in common, they proactively manage their cash flow and address the key issues which can improve it.

Ciaran O’Donnell is a Virtual Finance Director who works with many early stage businesses across a number of sectors. Most of the successful businesses he has worked with have similarities when it comes to their attitude and management of cash flow.

So, how do those successful businesses manage their cash flow?

They can have a clear visibility of their future cash flow and address the issues which maintain visibility and improve their cash flow

Ciaran suggests asking and addressing the following questions:

  • How much cash or investment is required to get my business cash flow positive?
  • When do I run out of money?
  • Does my business need funding during certain months of the year?
  • How can I change my working capital cycle to have more cash in my business?
  • How can I grow my business? Will I be able to do so with my own cash or will I need to borrow or raise investment? 
They can make better decisions

Successful businesses may have a better understanding of their current cash position and can make better financial decisions, for example, both short term and long term planning.

Ciaran noticed that successful businesses keep a close eye on their cash position, plus, the day to day operations of their business (e.g. closely reviewing management accounts and/or cash flow forecasts). By maintaining that visibility they are well placed to make decisions which don’t adversely impact the cash position or future cash flow of the business. Ciaran has seen some businesses rush into making poor decisions which have had a negative impact on their cash and financial position.

They can push for better payment terms with customers and suppliers

Successful businesses may also know when and how to lean on major suppliers for extended credit terms. One client who worked with Ciaran leant on six of their major suppliers who agreed to stretch payment terms from 30 days to 90 days for almost 12 months as the business was going through two separate investment rounds. Ciaran adds: “This helped our immediate cash flow significantly and the net-payables position for almost a year as key suppliers were keen to retain our business. The suppliers we leant on had sufficient financial strength themselves to offer the extended credit terms. Don’t be afraid to ask!”

Additionally, negotiating shorter payment terms with customers or, taking immediate payment (whether that’s cash, credit card or debit card) helps businesses achieve a healthier cash flow. Ciaran adds: “Another client completely changed their customer payment model and moved everything to online payments and direct debits. The business no longer had to chase customers for payments and also shortened their collections process by 45 days!”.

They tie-less money up in stock?

Stock can quickly tie up cash and impact your cash flow. Ciaran mentioned one rapid growth business that was unaware it had £100,000 in closing stock which was approximately six to eight months of sales at their current sales rate: “We conducted a relatively simple piece of analysis and calculated that we could implement a better buying and production process to operate with more efficient stock levels. Today, as the business continues to grow, order lead times are shorter, stock levels are lower and savings on bulk purchases will be considered as the business grows, but until then the business has less cash tied up in stock.”

They don’t always offer early payment discounts to customers

“Offering a discount to a customer for a quicker payment can benefit your short-term cash flow”, Ciaran tells us, “however, bear in my mind that discounts can significantly reduce your profit margins. It is worth considering what other options you have to raise short-term finance as there may be more cost-effective ways available to you.” 

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Written on in Business Insights Borrowing