By Susan Milicevic, Aspire Consulting
As strange as it sounds, more sales, greater revenue and faster growth can pose real dangers to a business.
The reason is that business growth often requires considerable investment and the business can come unstuck when there is a time lag between the investment and the return on it.
The way to overcome this is to understand how cash flows through your business – the cash flow cycle.
Cash Flow Cycle
Each type of business has a different cash flow cycle, but let’s take a very simple example of a retail outlet.
Obviously, the owner has cash which needs to be invested in stock. The stock is sold and converted back to cash.
Now, as a business owner you need to understand how long it takes for your stock to convert into sales? How long it take for your sales to convert into cash? You need to map it out and put days to it.
If you have invested a significant amount in stock it might take up to 180 days to get your money back, but in the meantime your have to pay staff and meet your overheads.
Service Based Businesses
The same challenge faces businesses offering a service. An owner must understand all the elements of the cash flow cycle and then work out how to positively influence them.
For example, the owner of a service based business has to pay wages to generate sales, send out invoices and get the cash back in. So, the way to positively influence that is to make sure you put in as little as you need to get a sale.
You make sure staff work efficiently. You make sure you have negotiated the best overhead rates, the best rent and the best priced supplies.
Secondly, you need to collect the money as quickly as possible. Just making this single change in your business can have a significant affect.
Obviously, when times are tough not everything works the way you want it, so then you explore alternative options for managing your cash flow. These may include single invoice financing or using an overdraft.
There are definitely solutions out there. It is simply a matter of understanding that there is problem at the outset and then putting a solution in place. That’s what we do as accountants. We help you identify a problem and find a solution.
The point at which you need to consider cash flow is well before you open the doors of your business. It must also be a part of your on-going planning especially if entering a growth phase.
Susan Milicevic http://aspire-ca.com.au/ 07 3036 1600