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Ten ways to optimize cash flow

More from Denise Deveau

The rules of cash flow are simple: a business is successful only if the cash it generates exceeds the cash it consumes.

“It sounds trite but it’s really true that cash is king,” says Jeffrey D. Sherman, author of the Cash Management Toolkit for Small & Medium Businesses published by the Canadian Institute of Chartered Accountants (CICA). “Even successful businesses can fail if they can’t meet the cash demands.”

Proper cash flow is about planning up front and tying back to your strategies. What are you trying to achieve and how are you going to do it?

However, a lot of entrepreneurs don’t plan because they’re not really financial people, he adds.

“They don’t know where they are, or how to get to where they want to be. Most successful businesses not only do a lot of initial planning, they also review everything on a regular basis to see what actually happened versus what they said would happen.”

John Hughes, partner in audit for Deloitte in Toronto, says getting it right lies in understanding the pluses and minuses of cash flow. “Proper cash flow is about planning up front and tying back to your strategies. What are you trying to achieve and how are you going to do it?”

Following are some tips for optimizing your cash flow:

1. Align payment terms for payables and receivables. If creditors are demanding payables in 30 days and customers are paying you in 45, you will run out of money. Follow up promptly on past due accounts. Structure agreements to include supplier discounts for early payment, and establish an interest charge policy for late payments by customers.

2. Plan your cash needs for the next quarter, year and several years out. If you foresee problems, look into extending lines of credit, increasing overdraft protection or applying for a business loan.

3. Determine your biggest expenses (e.g. cost of sales, cost of goods, shipping) and look for ways to reduce costs by negotiating with suppliers or putting jobs out for tender.

4. Watch your payroll costs. Staff according to your current needs and add more bodies when sales grow. It is better to work extra hours in the early stages and invest in additional people after the infrastructure is built.

5. Check your occupancy costs. Pare your utilities, phone services, etc. to the basics and keep your physical footprint to a minimum. Consider alternatives such as reducing space or letting people work from home.
Segment your customers based on their profitability. Determine the costs for servicing them and focus on the most profitable.

6. Evaluate your tax situation and ensure you have the right structure in place to optimize after-tax income.

7. Diversify your customer base so you aren’t relying on a single source for revenues.

8. Establish policies for managing cash, including mail handling, online banking procedures, cheque authorizations, reconciliation schedules, etc.

9. Network with peers. They can be an invaluable resource for sharing experiences.

10. Do your homework. The Cash Management Toolkit for example offers templates and tips to help small and medium businesses control and optimize their cash flow.

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