If your business is facing cash flow challenges, it is crucial to make some necessary adjustments. Cash flow is the essential element that enables you to meet your financial obligations promptly, such as paying your employees and bills. It also serves as the fuel for your business growth and expansion into new markets. Yet, its 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 manager and/or business owner.
In this post, we are going to look at couple of ways to start generating more cash from operations and/or free-up cash that is tied up in your business operations. taking control of your cash flow.
Five Ways To Improve Cash Flow From Business Operations:
#1: Assess your existing business model for diversification opportunities.
Before implementing any changes, it's important to have a thorough understanding of your starting point. Consider reviewing your current business model with your leadership team and analyze the following:
The 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.
Customer relationships.
Based on your existing business model, is there an untapped need that you aren't currently focused on that you can quickly focus on and market to customers?
Can you explore diversification by offering a product, technology, or service in a different sector within the energy industry or even outside of it, such as rare earth mining or chemicals? As an example, applying upstream energy technology used in oil and gas drilling for new energy transition markets such as carbon storage. How much effort would be involved in pivoting, what additional resources would you need, and what would be involved in marketing to a different segment?
One tool we use to conduct these strategic assessments is a facilitated SWOT Analysis that thoroughly examines the organization's strengths, weaknesses, opportunities, and threats. For more about SWOT Assessments, check out our Strategic CFO Advisory Services.
As you run through the assessment 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 a similar assessment during the last downturn (2014-2015) which ultimately led to the launch of our healthcare division, 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 or MFOR™ process 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.