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If one of your main objectives is to increase your turnover, it could cost you a great deal of money if you succeed. It could even cost you your business!
Growth can be very expensive (in terms of cash flow) and it destroys many thousands of good businesses around the world, every year. A profitable business that is growing rapidly can fail, if the cash is flowing too slowly and working capital is inadequate.
Here are four easy steps YOU can take in times of rapid growth, to improve your cash flow and strengthen your financial position. Even without rapid growth, your business will benefit substantially from these measures!
4 Easy Steps Towards Self Funded Growth
Step 1: Collect your debtors faster
Look carefully at your invoicing procedure. Do you encourage cash payments? Do you send invoices (with 7 day terms) as soon as your product or service has been rendered? Or, do you invoice at the end of each month and offer 30 days credit?
The difference between receiving cash on delivery and offering 30 days credit from the end of the month could be a difference (on average), of up to 60 days total credit (if the average payment comes in 45 days after the end of the month). That's 60 days of negative cash flow!
With 365 days in a year, 60 days represents approximately 16% of annual sales. This means that unless you 'tighten up' on your credit terms, for every $10,000 per annum you increase your turnover, you'll have to finance an extra $1,600 in working capital.
Research also reveals that for every 30 days your accounts remain unpaid, approximately 3.5% will become un-collectable!
The most stable, most profitable businesses, collect their cash FAST! How could you improve the collection of cash in YOUR business?
Action Required...
Determine the steps you'll need to take to collect your debtors faster.
1.
2.
3.
4.
5.
Action Required...
Determine your benchmark expectation for the 'maximum number of average days sales in debtors' and incorporate this 'Key Performance Indicator' into your monthly statistics.
Action Required...
Determine your benchmark expectation for the 'maximum number of days before you will invoice' and (if this needs constant monitoring) incorporate this 'Key Performance Indicator' into your monthly statistics.
Many businesses fall into the trap of not invoicing work in progress often enough. Work in progress accounts for part of your working capital requirements. If you're able to invoice for 'work done to date', this could be one area that offers you an opportunity for significant cash flow improvement.
Action Required...
Determine your benchmark expectation for the 'maximum number of days before you will invoice work in progress' and (if this needs constant monitoring) incorporate this 'Key Performance Indicator' into your 'Vision Scoreboard'.
Step 2: Reduce your inventory levels
If your business carries significant levels of inventory (in the form of raw materials or finished products), this too is an area that needs careful management in times of rapid growth. When your turnover increases, so too does your need for inventory and the need for cash to pay for it.
Start planning now for a more 'just-in-time' approach to inventory. It will improve your cash flow in good times and in bad.
Action Required...
Determine your benchmark expectation for the 'maximum number of days your inventory should last' or the 'maximum value' it should be (whichever is more appropriate for your business) and (if this needs constant monitoring) incorporate this 'Key Performance Indicator' into your monthly statistics.
Action Required...
Determine the steps you'll need to take to minimize your inventory levels.
1.
2.
3.
4.
5.
Step 3: Increase your margins
Increasing your prices is the obvious way to increase margins (as we discussed in Increase your prices). However often, it is easier (and certainly more desirable) to decrease costs. Take a close look at YOUR fixed and variable costs.
Here's an example of how significant a 5% cost saving can be.
A magazine publisher has an annual turnover of $1,000,000.00. The total cost of running his business is $900,000.00 so his net profit per annum is $100,000.00 or 10% of turnover. If he can organise his affairs better and negotiate with suppliers to achieve a 5.55% saving on costs across the board, his total expenses for the year will reduce to approximately $850,000.00. His net profit will then become $150,000.00, That's a 50% increase. An extra $50,000.00 from just a small percentage saving on costs.
Action Required...
What cost reductions may you be able to negotiate for your business today? Always look at your biggest costs first. Don't confuse your costs (ie: rent) with your investments (ie. Marketing). Aim to reduce your costs and increase your return from your investments.
1.
2.
3.
4.
5.
Action Required...
Determine your benchmark expectation for the 'maximum acceptable value of monthly fixed costs' and (if this needs constant monitoring) incorporate this 'Key Performance Indicator' into your monthly statistics.
Action Required...
Determine your benchmark expectation for the 'minimum acceptable gross profit percentage' and incorporate this 'Key Performance Indicator' into your monthly statistics.
Action Required...
Determine your benchmark expectation for the minimum acceptable net profit percentage and incorporate this 'Key Performance Indicator' into your monthly statistics.
Step 4: Pay your creditors slower
This is the most obvious method for reducing your working capital needs. I don't recommend you withhold payment from your creditors for longer than their terms of trade however, if you're experiencing cash flow problems, this is often the easiest technique for you to use.
Action Required...
Determine your benchmark expectation for the 'minimum number of average days sales in creditors' and (if this needs constant monitoring) incorporate this 'Key Performance Indicator' into your monthly statistics.
Putting it all together...
Let's compare 2 magazine publishers. One ('Smart Publishing') is using all of the above methods to minimize their working capital requirements, while the other ('Plodder Publishing') is just plodding along without taking much financial care at all.
Look at the difference in working capital requirements for each business!
Turnover $1,000,000 each ($83,333 p/mth)
'Smart Publishing'
Working days before invoicing? Zero days = $0
Ave. debtors days o/stg. from invoice date? 15 days = $41,666
Ave. creditors days o/stg.? (40% of sales) 60 days = ($66,666)
Stock on hand - % of monthly sales? 30% = $25,000
Net working capital needed... = $0
'Plodder Publishing'
Working days before invoicing? 15 days = $41,666
Ave. debtors days o/stg. from invoice date? 45 days = $125,000
Ave. creditors days o/stg.? (40% of sales) 30 days = ($33,333)
Stock on hand - % of monthly sales? 60% = $50,000
Net working capital needed... = $183,333
Copyright 1995 - 2007 Brad Tonkin Business Consultant
Growth can be very expensive (in terms of cash flow) and it destroys many thousands of good businesses around the world, every year. A profitable business that is growing rapidly can fail, if the cash is flowing too slowly and working capital is inadequate.
Here are four easy steps YOU can take in times of rapid growth, to improve your cash flow and strengthen your financial position. Even without rapid growth, your business will benefit substantially from these measures!
4 Easy Steps Towards Self Funded Growth
Step 1: Collect your debtors faster
Look carefully at your invoicing procedure. Do you encourage cash payments? Do you send invoices (with 7 day terms) as soon as your product or service has been rendered? Or, do you invoice at the end of each month and offer 30 days credit?
The difference between receiving cash on delivery and offering 30 days credit from the end of the month could be a difference (on average), of up to 60 days total credit (if the average payment comes in 45 days after the end of the month). That's 60 days of negative cash flow!
With 365 days in a year, 60 days represents approximately 16% of annual sales. This means that unless you 'tighten up' on your credit terms, for every $10,000 per annum you increase your turnover, you'll have to finance an extra $1,600 in working capital.
Research also reveals that for every 30 days your accounts remain unpaid, approximately 3.5% will become un-collectable!
The most stable, most profitable businesses, collect their cash FAST! How could you improve the collection of cash in YOUR business?
Action Required...
Determine the steps you'll need to take to collect your debtors faster.
1.
2.
3.
4.
5.
Action Required...
Determine your benchmark expectation for the 'maximum number of average days sales in debtors' and incorporate this 'Key Performance Indicator' into your monthly statistics.
Action Required...
Determine your benchmark expectation for the 'maximum number of days before you will invoice' and (if this needs constant monitoring) incorporate this 'Key Performance Indicator' into your monthly statistics.
Many businesses fall into the trap of not invoicing work in progress often enough. Work in progress accounts for part of your working capital requirements. If you're able to invoice for 'work done to date', this could be one area that offers you an opportunity for significant cash flow improvement.
Action Required...
Determine your benchmark expectation for the 'maximum number of days before you will invoice work in progress' and (if this needs constant monitoring) incorporate this 'Key Performance Indicator' into your 'Vision Scoreboard'.
Step 2: Reduce your inventory levels
If your business carries significant levels of inventory (in the form of raw materials or finished products), this too is an area that needs careful management in times of rapid growth. When your turnover increases, so too does your need for inventory and the need for cash to pay for it.
Start planning now for a more 'just-in-time' approach to inventory. It will improve your cash flow in good times and in bad.
Action Required...
Determine your benchmark expectation for the 'maximum number of days your inventory should last' or the 'maximum value' it should be (whichever is more appropriate for your business) and (if this needs constant monitoring) incorporate this 'Key Performance Indicator' into your monthly statistics.
Action Required...
Determine the steps you'll need to take to minimize your inventory levels.
1.
2.
3.
4.
5.
Step 3: Increase your margins
Increasing your prices is the obvious way to increase margins (as we discussed in Increase your prices). However often, it is easier (and certainly more desirable) to decrease costs. Take a close look at YOUR fixed and variable costs.
Here's an example of how significant a 5% cost saving can be.
A magazine publisher has an annual turnover of $1,000,000.00. The total cost of running his business is $900,000.00 so his net profit per annum is $100,000.00 or 10% of turnover. If he can organise his affairs better and negotiate with suppliers to achieve a 5.55% saving on costs across the board, his total expenses for the year will reduce to approximately $850,000.00. His net profit will then become $150,000.00, That's a 50% increase. An extra $50,000.00 from just a small percentage saving on costs.
Action Required...
What cost reductions may you be able to negotiate for your business today? Always look at your biggest costs first. Don't confuse your costs (ie: rent) with your investments (ie. Marketing). Aim to reduce your costs and increase your return from your investments.
1.
2.
3.
4.
5.
Action Required...
Determine your benchmark expectation for the 'maximum acceptable value of monthly fixed costs' and (if this needs constant monitoring) incorporate this 'Key Performance Indicator' into your monthly statistics.
Action Required...
Determine your benchmark expectation for the 'minimum acceptable gross profit percentage' and incorporate this 'Key Performance Indicator' into your monthly statistics.
Action Required...
Determine your benchmark expectation for the minimum acceptable net profit percentage and incorporate this 'Key Performance Indicator' into your monthly statistics.
Step 4: Pay your creditors slower
This is the most obvious method for reducing your working capital needs. I don't recommend you withhold payment from your creditors for longer than their terms of trade however, if you're experiencing cash flow problems, this is often the easiest technique for you to use.
Action Required...
Determine your benchmark expectation for the 'minimum number of average days sales in creditors' and (if this needs constant monitoring) incorporate this 'Key Performance Indicator' into your monthly statistics.
Putting it all together...
Let's compare 2 magazine publishers. One ('Smart Publishing') is using all of the above methods to minimize their working capital requirements, while the other ('Plodder Publishing') is just plodding along without taking much financial care at all.
Look at the difference in working capital requirements for each business!
Turnover $1,000,000 each ($83,333 p/mth)
'Smart Publishing'
Working days before invoicing? Zero days = $0
Ave. debtors days o/stg. from invoice date? 15 days = $41,666
Ave. creditors days o/stg.? (40% of sales) 60 days = ($66,666)
Stock on hand - % of monthly sales? 30% = $25,000
Net working capital needed... = $0
'Plodder Publishing'
Working days before invoicing? 15 days = $41,666
Ave. debtors days o/stg. from invoice date? 45 days = $125,000
Ave. creditors days o/stg.? (40% of sales) 30 days = ($33,333)
Stock on hand - % of monthly sales? 60% = $50,000
Net working capital needed... = $183,333
Copyright 1995 - 2007 Brad Tonkin Business Consultant