The end goal of effective cash flow management is a financially healthy business. If you’re managing a growing company you’ll need to ensure a positive cash flow, where the business’ long-term cash inflows exceed its long-term cash outflows. And, according to business expert Verne Harnish, you’ll want to generate enough cash internally so that you don’t have to turn to banks, investors or loan sharks to fuel your growth.
So what are some of the more effective ways to get this right?
Shorten cycle times, eliminate mistakes and change your business model
A business’ cash conversion cycle (CCC) measures how long it takes for each rand spent on a business’ running costs, overheads and salaries etc. to move through a business and back into the business owner’s pocket. According to Harnish, ways to improve your CCC include shortening cycle times, eliminating mistakes and changing your business model.
Shorten cycle times: This not only involves reducing sales cycles so that money flows into your business quicker, but also includes getting invoices out in time so that payments aren’t delayed. Creating a good rapport with clients and customers means they won’t mind you phoning ahead to remind them of payments due. These reminders, as well as quickly following up with customers about overdue payments, are other ways to speed up your CCC.
When it comes to good cash flow management, Harnish also suggests that you incentivize early account payments with some sort of reward system for clients who settle their accounts in time. These incentives could be a small discount, freebies, or special thank you notes to acknowledge timely payments. Specifying payment due dates on invoices is another simple yet effective way he recommends to get accounts paid on time.
Eliminate mistakes: Harnish maintains that angry customers are often slower to make payments, which is why your customer service needs to be excellent. He lists incomplete invoices, invoicing errors and missed deadlines as costly mistakes that can slow down cash flow cycles.
Other ways to eliminate mistakes in your business’ CCC include:
- Focusing on one job at a time so that you complete it properly and quickly and keep customers satisfied.
- Asking for customer feedback about completed jobs and improvements needed.
- Customising invoices to match clients’ billing needs.
Change your business model: To avoid having to approach a venture capitalist, investor or bank to fund your business growth, Harnish recommends that you apply some flexible thinking towards your existing business model. His examples include:
- Offering consulting services on the side to create a hybrid business model.
- Working either part time or full time while building your company.
- Negotiating deals with other companies to use their copies of expensive tools and software systems ‘after hours’ to develop your services and products.
- Getting vendors to bid online for contracts – the best offer wins.
Regularly sitting down to assess your business expenses and recurring charges to look for saving opportunities is another way to improve profitability. Also be sure to educate your business managers about the impact that their decisions might have on cash flow. This will help them make better cash flow management choices for your business.
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