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On Cashflow Management – and a hint!


Cashflow management is a critical issue for many business owners.

Typically, your cashflow comes under strain in the following circumstances (not an exhaustive list):

  • your business is growing
  • stock levels increase (eg: lead-up to Christmas for retailers)
  • bringing on new staff
  • increasing production capacity
  • diversifying your business activities

Each of these things can be a “cash thief”.

Let’s consider the issue of inventory(stock) management.  The more stock you have on hand, the more cash you have tied up.  I explain this in more detail here, here and here.  By reducing your stock levels, you free up a lot of cash, however you need to balance out the level of stock you need.  You cannot sell what you don’t have!  Effective stock management makes a huge difference to your cashflow.

Cashflow management can also be impacted by increasing production capacity.  Being able to make a lot more “stuff” requires you to have the raw materials, equipment and people to do this.  All this costs.  Your wages come in each week, your suppliers need to be paid each month and the equipment needs to be purchased/financed.  All this robs cash from the business – and you haven’t yet produced anything you can sell.  By building your capacity, you will be able to (hopefully) generate more sales and/or better margins.  But you have to spend first.  This is where your cashflow management needs to be carefully curated.

The Hint

A number of our customers have pretty regular sales.  They use this to reduce their margins (sometimes!) to generate additional sales and hence cashflow.  You find that there is a very clear cycle for this.

One of my favourite fishing tackle stores is in Melbourne.  They have a great range of products, know what they are on about and provide great service.  Over the past year or so, I have noticed that they are having regular sales in the sixth week after the end of each quarter.  This is because they have the Tax Office commitments to meet.  They need to free up cash to pay our friends in Canberra. Knowing this, you, as a customer, can manage your time for purchasing gear.

The same thing occurs in a lot of businesses (especially retail).  Have a look at the sales cycles and you will see a trend.  The margin is better in your pocket than the retailer’s!

So…

Any time you look at the cashflow in your business, get behind the issue to find out what is driving it.  Sales too low?  Margins being squeezed?  Inventory too high?  Expanding?  Diversifying?  Any and all of these can have a significant impact on your cash reserves.

Cashflow management can be difficult.  But when you look behind the numbers and develop your understanding of what drives your cashflow, you will be in a far better position to make the decisions and changes needed to improve things.

We have access to some really powerful cashflow modelling tools that will enable you to see the real picture – going forward.  If you would like to have a chat with us about how we can help you get a better handle on your cashflow management, give us a call!

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