Cashflow is a business lifeline, Without it, there's a significant chance a business will cease to exist;

even if it's profitable.


Wondering if your cashflow is worth taking time to think about? Then consider this. If you are:

·         Unable to cover your total monthly expenses easily with your total monthly income;

·         Not being paid your desired wage;

·         Unable to pay all your taxes;

·         Then you have a cashflow management problem.


If you're breaking out in a sweat right now, rest easy, there are ways to improve your cashflow but first you

must understand what cashflow is and how it circulates around your business.


Cashflow is the flow of money coming in and the flow of money going out. How much cash you have in your

business at any one time (cashflow) is determined by how much cash you have coming in less how much cash

you have going out.


Cash circulates around your business. You manufacture or produce goods (cash out) and then you sell them

(cash in) and on it goes.  It sounds simple, and it is. However, it's the processes that surround this cycle that

often create timing issues.


There are permanent pulls on cashflow which can cause havoc if not managed e.g. drawings, tax, loan repayments and asset purchases. 

The length of time it takes you to purchase your goods and have these goods convert into cash in the bank is called your Cash Conversion Cycle. The less time this process takes, the better your cashflow and when your cashflow works for you it's easier to cover your monthly expenses, pay yourself your desired wage, cover your taxes, and avoid having unnecessary debt.

Here's an example of a Cash Conversion Cycle calculation.




The Cash Conversion Cycle gives the business owner clarity around how long it's taking between cash going out and cash coming in; in this example it's 76 days.


Simply by working out this calculation the business owner has gained valuable insight into why and how their cashflow is impacting their business.


Reducing the number of days in this cycle significantly improves the business's cashflow and this can be achieved by taking a closer look at your business processes.


For example if Accounts Receivable days reduced by 9 days and Inventory days reduced by 6 days there would be an additional $105,370 in your bank account today (presuming Sales are $3,000,000, Accounts Receivable $420,000, Cost of Goods Sold $1,910,000 & Inventory $320,000.)


There are 7 areas which contribute to the length of your Cash Conversion Cycle and below we've given you some ideas on how to begin reducing the number of days in each area and start enjoying better cashflow today:


1.       Accounts receivable

Reduce the time between billing and banking by tightening your Terms of Trade, offering prompt payment benefits and streamlining your billing process to work like clockwork each month.


2.       Accounts payable

Review suppliers' terms of trade and discount. Implement budgets, streamlining your payments process to maximise prompt payment discounts and avoid late payment penalties.


3.       Inventory process

Review your stock ordering systems and stock control processes and identify strategies to ensure cash hits the bank sooner i.e. think about how you could get your goods out even one day faster.


4.       Inappropriate debt/capital structure

Review existing debt and capital structure. Could debt be consolidated and paid off over a longer term? Review and adjust what you're drawing from the business or identify if the business needs a capital injection to fund its growth.


5.       Overheads too high

Review your overheads annually.  Look at the effectiveness of your marketing spend, go paperless, put expense budgets in place and change your technology platform to reduce overheads.


6.       Gross profit margins too low

Review your gross profit margins and know what's left from sales after variable costs are deducted. Increase margins by focusing on rework and wastage, reducing stock shrinkage and improving team productivity.


7.       Sales levels too low

Identify ways to increase sales for example focus on customer retention, generating leads, improving sales conversion, customer transaction frequency and pricing strategies.