How to Improve Cash Flow From Energy Operations
Updated: May 21, 2022
If you’re struggling with cash flow in your business, it’s time for a change.
Cash flow is the lifeblood of any business. It’s what ensures that you can pay your staff and bills on time, and it’s what allows you to grow your business and expand into new markets.
It’s also one of the most overlooked aspects of business. Learning how to improve cash flow in your business is a key component of being a successful business owner.
Here are five ways that businesses can free up or generate more cash from operations during these times.
#1: Evaluate your current business model
Before making any changes, it's important to get a firm grasp of your starting point. To do so, consider spending some time with your leadership team to revisit your current business model and examine the following:
Business activities that currently generate revenue
Essential resources including talent, know-how (intangible assets – contracts, supply side relationships, intellectual property), software, equipment and facilities, and materials
Your value proposition
Based on your current business model, is there a need that you aren't currently focused on that you could ramp up quickly and market to customers?
Could you diversify your business and offer customers a product or service in a different energy swim lane? How about outside of the energy markets – in mining or chemicals or another industry?
Alternatively, could you offer a product or service that requires little work to a customer, such as a safe vertical market in an upstream or downstream segment?
One tool we use to conduct these strategic reviews is a facilitated SWOT Analysis that looks at the organization's strengths, weaknesses, opportunities, and threats. For more about strategic reviews, check out our Strategic Advisory Services.
As you run through the evaluation with your leadership team, keep these questions in mind, and look for ways to pivot and start generating more income quickly.
The Energy CFO went through the same process during the last downturn (2014-2016) which led to the launch of our healthcare division in 2019, The Healthcare CFO. We have firsthand experience re-evaluating business models and pivoting into new markets.
#2: Manage customer credit and account receivables
One of the most effective ways to improve cash flow is to focus on managing customer credit and accounts receivables. Here are some questions to help get you started:
Do you have a process for approving new customers, reviewing their credit history, and establishing credit limits?
Does your organization have established payment terms consistent with current industry standards? How about early payment discounts or late fees?
Does your leadership review Aged Accounts Receivable periodically and coordinate or assist with collections to keep customers current?
Do you link accounts receivable and collections metrics with management performance?
#3: Reduce operating expenses
Reducing operating expenses increases cash flow from operations. Examine your current operating services to see what you could outsource without compromising quality and customer service. Outsourcing saves, on average, one to three percent in gross margin. It can also improve cash flow and eliminate the headaches of your ongoing attention to certain aspects of the business.
The Energy CFO offers Outsourced CFO Services and Financial Planning and Analysis. Included in this bundle is our keystone Monthly Financial and Operational Reviews (MFOR) that we conduct via Zoom with your leadership teams. Our clients find this service valuable and critical to their success. We offer a high quality holistic service, fast turnaround, and our services are highly cost effective.
#4: Reengineer business processes
You can reduce your cost of goods sold, operating, general and administrative (G&A) expenses by targeting high volume, low-value work opportunities.
Start by looking at these business processes and associated expenses and asking you team what can you streamline, outsource, or automate? Also consider historic gaps or pain points - maybe you can eliminate them at the same time.
The goal is to find ways to accomplish more with less manpower - so you can redeploy your manpower to focus on higher value work (like collecting receivables). Your business could benefit from reducing direct employee expenses and any hidden costs or potential bottlenecks that contribute to other problems. Don’t forget to factor in the cost of indirect owner time and costs associated with these business process as well as the opportunity cost of higher value work not getting completed due to competition for time, attention, and resources. Remember the 80/20 general rule.
#5: Assess remote workforce options permanently
During 2020, did your company, and particularly your admin and functional support departments (sales, marketing, engineering, credit, procurement, finance, accounting, payroll, collections, HR, etc.) work from home? Assess how effective your back office was during this time and consider using a remote work model or some hybrid moving forward.
Maybe its not a one-size-fits-all. Would it make sense to have select members of your work force continue working remotely at least part of the week or the month? If so, you could potentially reduce office space requirements to generate significant savings or rent the extra space out to a smaller company.
Before you make any decisions, schedule a meeting to talk about compensation issues for remote work with your Human Resources manager.
What options do you have to re-evaluate existing compensation?
What are your competitors doing?
What about payroll tax implications? If you use a payroll service provider or CPA, call them and invite them to participate in the conversation.
There is a value and benefit to employees who want to work remotely. It's convenient, saves personal travel time, provides more affordable geographic options, and reduces household costs in terms of transportation, meals, etc.
We Can Help. Four Easy Steps to Get Started!
Do you need someone to help freeing up your cash flow? We specialize in Cash Management, Cash Forecasting, and Business Intelligence Reporting.
You can contact us to schedule a consultation with a CFO Advisor. We can schedule a Zoom meeting and get started brainstorming with your team.