Posts Tagged ‘increase cash flow’
How Properly Managed Cash Flow Strengthens Businesses
By accounting standards cash-flow cycle is defined as the number of days from a decision to produce a product (or render a service) to the date money is actually received from selling the product or service.
During the cash-flow cycle, the company’s bank account fluctuates from a deficit to a surplus level.
The cycle starts when materials, labor and overhead are purchased. The purchase creates a simultaneous accounts payable and inventory. The next step turns inventory into finished goods which are sold to customers. If the sale is on credit, an account receivable will be generated. The final step of the cycle is collecting the receivable and receiving the funds.
If money is paid out on the tenth day and money is collected on the fortieth day, the cash flow cycle is 30 days. Typically, a bank credit line is established to finance this 30 day time factor. As production continues, the cash-flow cycle repeats over and over again.
Management actions may change the time factor. For example, granting more lenient credit terms and paying bills sooner can increase the time factor. A growing time factor could be a danger signal if not properly managed. In contrast, if management creates more stringent terms by requiring cash, cash deposits or installment terms cash flow can be increased.
The cash-flow cycle is intensified if a company’s business is seasonal. During slow periods, firms in seasonal businesses try to control costs and limit losses. However, fixed costs must be paid.
The cycle can be further disturbed if the profitable months do not outweigh the loss months. If lenders lose confidence in management’s abilities, credit lines will be cancelled.
Cash-flow cycles are a business reality. They lead to trouble only when sales are highly seasonal or when annual cash flow is negative.
The first step in effective cash flow management is to schedule out, on a monthly or weekly basis, anticipated cash receipts and cash disbursements. The difference between receipts and disbursements equals cash flow. When cash flow is positive, funds are flowing into the company; when cash flow is negative, funds flow out.
Cash flow and profit are not the same. Profit is the difference between sales and cost. The one major difference is this: cash flow considers only money actually entering or leaving the company, while profit is calculated without considering whether funds have actually been received or disbursed.
More businesses fail because they have lost sight of their cash-flow challenge or because they have lost the faith of their lenders than for any other single cause. In the current economy with a tighter credit market, failures are even more likely.
The confidence of lenders or investors can be regained by establishing a sound cash flow management process. If you are interested in evaluating your business’ cash flow management process to determine if there are opportunities to increase cash flow please contact me directly at firstname.lastname@example.org or 630-269-7646.
The Wisdom of Henry Hazlitt (1894 – 1993)
There are always any number of schemes for saving the X industry (The X industry is one that is obsolete, for example the Horse and Buggy trade). One such contention is that the X industry is already “overcrowded”, and to try to prevent other firms or workers from getting into it. Another proposal is to argue that the X industry needs to be supported by a direct subsidy from the government.
Now if the X industry is really overcrowded as compared with other industries it will not need any coercive legislation to keep out new capital or new workers. New capital does not rush into industries that are obviously dying. Investors do not eagerly seek the industries that present the highest risks of loss combined with the lowest returns. Nor do workers, when they have any better alternative, go into industries where the prospects for steady employment are least promising.
Similar results would follow any attempt to save the X industry by a direct subsidy out of the public till. This would be nothing more than a transfer of wealth or income to the X industry. Taxpayers would lose precisely as much as the people in the X industry gained.
It is equally clear that other industries must lose what the X industry gains. They must pay part of the taxes that are used to support the X industry.
The result is also that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed.
If the X industry is shrinking or dying by the contention of its friends, why should it be kept alive by artificial respiration? In order that new industries may grow fast enough it is usually necessary that some old industries should be allowed to shrink or die. In doing this they help to release the necessary capital and labor for the new industries. If we had tried to keep the horse-and-buggy trade artificially alive we should have slowed down the growth of the automobile industry and all the trades dependent on it.
Paradoxical as it may seem to some, it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second.
— Paraphrased From Economics in One Lesson (1946)
What is the Cost of Your Bottleneck to Your Business?
You are in your car and suddenly you find the two-lane highway narrowing to one lane. Traffic flow slows to the pace at which two lanes of traffic can merge into one. Your speed of 60 slows to perhaps 20 and can even be a stop and go to move ahead one car length. This is a bottleneck.
Bottlenecks are occurring everywhere in the business world. Bottleneck in business happen in the processes employed in every business. They happen in production, distribution, fulfillment, billing, filing, etc. They happen in manufacturing companies, distribution, retail, construction, real estate, consulting, financial services, and service businesses of all kinds. Bottlenecks are rampant in non-profits, and in government and the bureaucracies they employ.
I believe the primary culprits that cause bottlenecks are these:
- Inadequate infrastructure—capacity has topped out
- Inefficient processes—the quantity of raw material (or data) processed in a given time, known as ‘throughput’ has topped out
- Poorly trained workers—individual production has topped out
Capacity constraints affect a company’s ability to grow. Firms that find themselves bumping up against their system’s capacity constraints soon find that growth has stopped; profits begin to decline unless expenses are cut accordingly.
Any part of your business that has a capacity bottleneck will find the production and efficiency of everyone reduced to the speed of throughput at the bottleneck. The operation will slow to the lowest common denominator—the productivity at the slowest part of the process.
For example, if a bottleneck is reducing throughput by 30%, and your customers are unwilling to wait in line, your sales levels could be 30% lower than what they should be. How much margin are you losing at the bottleneck? If your normal throughput is $1,000,000 annually and the bottleneck reduces it by 30%, you have a new sales level of $700,000. At a gross margin of 60% applied to the lost sales of $300,000, the lost profits amount to $180,000! And this is just a one million dollar organization!
Worse yet, are you paying for “stand around” time while the under performing parts of your process “catch up” to the rest of your production?
What could you do with the money that you are leaving on the table?
As for the government bottlenecks, they just seem to throw more people and money at it without addressing the three culprits. And you and I are paying for this bad practice as government and bureaucracies have become the largest employer of record throughout our entire economy!
If you are concerned that your business is leaving money on the table due to bottlenecks, and want to quantify the expense and explore alternative solutions, please contact me directly at email@example.com or 630.269.7646. I’m available to discuss options to unlock the revenue and increase cash flow.