Making Payroll
As I sat down to write this article, I was focused on the unique challenges that leaders of businesses of different sizes face in improving their profitability. It’s a whole different ball game when you transition from a $10B+ corporation to steering the ship of a $10M-$100M company.
Reflecting on my own experience running a $1M company and comparing it with the experiences of my clients and friends who manage larger companies, one constant emerged: payroll. Or, in other words, cash flow. My simplistic summary is that the common challenge was not just about generating profit, but ensuring there was enough cash at hand to meet payroll every month.
In my experience, I found myself constantly checking on accounts receivable, negotiating extended payment terms with suppliers, and carefully managing inventory to avoid disrupting work or risking deliveries. Every payroll cycle successfully completed felt like a victory.
Ways to Improve Cash Flow
In a business landscape where growth and profitability are paramount, and borrowed cash comes at a high cost, the importance of cash flow management cannot be overstated. So, this article is a reminder about the significance of cash flow and offers practical strategies to improve it.
While I’ll leave the intricate details of cash flow to the finance specialists, our focus today is on the fundamental formula: Cash Flow = Cash Inflows – Cash Outflows. To enhance your cash flow, you can increase your inflows, reduce your outflows, or ideally, do both.
Some operational strategies to achieve this follow:
Strategies to Increase Cash Inflows:
Streamline Invoicing: Ensure invoices are issued promptly and overdue payments are followed up on.
Manage Receivables: Encourage early payment by offering discounts and conduct credit checks on new customers.
Increase Pricing: Consider adjusting prices to cover recent and forecasted input cost escalations to improve profit margins.
Strategies to Reduce Cash Outflows:
Optimize Inventory: Implement just-in-time inventory management to minimize holding costs.
Negotiate with Suppliers: Work on extending payables and negotiating better payment terms.
Control Costs: Regularly review expenses and eliminate unnecessary costs.
Improve Cash Flow Forecasting: Use financial data to anticipate future cash needs and avoid overstocking.
Implementing these measures can help maintain a healthy cash flow balance, improving your business’s liquidity and financial resilience.
Call to Action
Now that we’ve explored the importance of cash flow and strategies to improve it, it’s time to put these insights into action. Start by identifying one area in your business where you can increase cash inflows or reduce cash outflows. Remember, even small changes can have a significant impact on your cash flow over time. Let’s make cash flow management a priority today for a more financially resilient tomorrow.
For further reading, there’s no shortage of good information out there. One article that is particularly interesting is by James McNeill Stancill from March 1987 called, When Is There Cash in Cash Flow? (hbr.org). An oldie but goodie in that the author helps you think through how much free cash you’ll really have and how to segment your cash demands to make better decisions on how you’ll spend it.
Bonus Points
The "increase pricing" and “control costs” strategies to improve cash flow are also key elements to making your company more profitable!
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