ImprovingSmallBusinessCashFlow

CraigAlexanderOrrMBA,MSc,HND

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FindingCashinYourBusiness-

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Tableofcontents

Chapter1-Introduction
Chapter2-TheCashFlowFormula

Chapter3

-FocusonCashCustomers

Chapter4

-StrategicSolutionsPlan

Chapter5

-Conclusion

Chapter1

Introduction

CuttingcostsandimprovingCashFlowiswhereallsmallbusinesses

needtoberightnow.Thebigquestioniswheredoyoustart?Thisguide
provides the steps to help you to rapidly find the Cash buried in your
business.

Recently the owner of a small business said to me I am quoting for

morebusinessopportunitiesthaneverbefore,convertingless,constantly
runningshortoftimeandmycostskeepgoingup.Heshowedmeintohis
officewhereringbindersfullofquotesthathadnotconvertedtoorders
werestackedinwaistheightpiles,takingupvaluablefloorspace.MayI
firstsaythattheseguyswereexpertsatfillingquotes,withakeeneyefor
methodicalapproach,andifthathadbeentheircorebusinesstheywould
have been very profitable. Mentally I could see cash sticking out of the
ringbindersandfallingontothefloor.Heaskedmetheobviousquestion
why have I lost out on so many quotes? His business was a car body
repairshopandratherthanprovideananswertoasubjectIknewnothing
about. I asked him to indulge me as we started to evaluate how much
moneyhehadinvestedincreatingthestacksofquotes.Theresultswere
staggering in one year alone he had investing about two years wages,
whichhadultimatelyfeedthroughtohisbottomlinecostsandexplained
whyhewasbusierwithoutseeinganyimprovementincashflow.

Small businesses cannot afford the luxury of doing “business as

usual”inarecessionaryenvironmentitiscriticaltore-evaluatehowyour
business operates. Download The Business survival workshop -

http://www.smashwords.com/books/view/73829

to focus your business

onwhatyoudobest.

Costcuttingcanbeabitlikeliposuction,providinganunsustainable

quick fix, unless you make the required life style changes the problem
will quickly comes back. This short guide will provide pointers to help
you assess where you may have developed habits that are stopping you

frombeingmoreprofitable.

FirststopisaprocessofCashFlowtriage;identifyingwherethebig

issues are. Once the issues are identified it’s time to create a strategic
solutions plan. This enables the small business to achieve the greatest
returns within the shortest amount of time. The strategic solutions plan
will ensures that the life style changes required to sustain cost
management and improve long-term business performance become
embeddedintothedaytodayrunningofthebusiness.

The Cash Flow Formula was developed after extensive research into

understanding and improving the way companies handle Cash. The
circular wheel shown below is the ‘aide memoire’ to drive a systematic
approach to the analyse. Each of the segments in the circle are broken
down

detail

the

various

resources

available

http://www.craigscopy.com

and in the Finding Cash in Your Business

ebook-

http://www.smashwords.com/books/view/62199

CashinStrategy

With most of the world’s economies at their worst condition since

World War 2, as never before a clear “Cash in” strategy plays an
important role in a small business’s success. In today’s turbulent
competitive environment, companies more than ever need a “Cash in”

strategy that keeps reminding them of the competitive advantage
achievedbybeingsmarterwithcash.

As the Global recession bites it is important to review your current

business product or service and customers mix as a priority. It may be
that your order book is still full making you feel insulated from the
recession. When in fact what you are actually experiencing is the effect
of customers who are progressing orders that were approved years in
advance,andthecurrentmarketconditionmaynottakeeffectformonths
oryears.Thekeyquestionhereiscanyourcustomersstillaffordtopay?

AIR

Inpreparingforthefutureyoursmallbusinessneedsto:

dapttothemarketconditions;createanactionplanbasedonwhat

products and or services are most likely to continue to be sold in a
recessionaryenvironment.

nitiate collaborative discussion with existing customers and

supplierswhoarestruggling.

eview existing and target customers and set new credit limits and

create risk bandings based on which companies are most likely to
survive.

Rememberyoucannotlivewithout

AIR

dapttothemarket,

nitiateDialogueand

eviewCustomers.

Chapter2

TheCashFlowFormula

The Cash Flow Formula has been adapted to help you develop a

systematic approach to understand and improve the cash flows within
your businesses. The Formula knits together a number of accepted
managementtechniquessuchasratioanalysisandParetotoarriveatthe
CashFlowFormula.

TheFormulacanbestartedatanyofthesevensegments,especiallyif

youalreadyhaveidentifiedareasofconcern,orasegmentdosenotapply
to your company, however, generally in small business environment
jumping straight to Credit Control will have the biggest impact on
improvingCashFlow.

Herearethe7segments:

Competitors

Identify the key customer requirements used to compare you with

your competitors. Focus the business on improving those key customer
requirements.Communicatetheimprovementstoyourcustomerbase.

CashFlowbyCompany

Focus in on the area of the company that is expected to demonstrate

the highest returns in the medium term. Where there is high growth
potentialthegreatestopportunityforpoorfinancialcontrolsexists.

BusinessModel

Analyse your business model against the business’s current

performance. Challenge yourself as to if the business model is still
currentandtheoperationalstrategyderivedfromthatisstillcorrect.

InternalAccounts

Take a close look at the Internal Accounts. Graph them over a 4-

month period and compared them to the previous years results over the
same period. This trend analysis is used to highlight areas where cash

flowimprovementsarerequired.

Productcontribution

Determining which products have the greatest contribution to the

company’sprofitscanbeusedtofocusfutureproductdevelopmentsand
withdrawals. The highest contributing products will have the greatest
impactonthemanagementofCashflows.

CashFlowbyProduct/Service

Detailed deconstruction and mapping of the Working Capital Cycle

(WCC) for each of the products is used to determine which products or
servicesprovidethebestuseofcashwithinthebusiness,italsoensures
thatsupplierscredittermsarecontrolledandmanagedeffectively.

Creditcontrol.

Analyse when customers pay their bills so that irregularities can be

identifiedbeforelargedebtsareamassed.Understandingthekeydatesin
theWCCforaproductorserviceallowsbetteruseofthecreditgivenby
vendorsandthedebtowedbycustomers.

Chapter3

FocusonCashCustomers

Whether you are a small business or a large corporate “Having too

many customers can break you, and focus on Cash Customers is
essential!” What many businesses don't get, is that the customer
acquisition and maintenance cost are normally far greater, than the
moneythecustomerwillspendwithyouontheirfirstsale.Onaveragea
business need to bring each customer back at least 5 times before they
willbegintogenerateaprofitandbecomegoodqualityCashcustomers.

One business I looked at had just over 700 customers, but was

strugglingtosellintotheircustomerbase.

InitiallyIaskedforahistoricallistofhowmucheachcustomerhad
spentwiththecompany.
My next question was how many customers regularly do business
withthecompany.Ofthe700only70regularlydidbusinesswiththe
company.
Nowcomesthecrucialquestion‘ofthe70howmanypaytheirbills
ontimeoratall?’nowwearedownto30.
I then asked for credit ratings for the 30 left and that brought the
numberofgoodCashcustomersdownto20.

The company had made the fatal mistake of not understanding the

cost of customer acquisition and maintenance. The expectation was that
allcustomersareequalandsotheyweresharedoutequallyamongstthe
salesstaff.

The average business spends 6 times more trying to win a new

customer, than it does generating new business from an existing
customer.

In recognition of this fact the solution required a combination of

reducingthesizeofthesalesteamandprovidingamoreappropriatelevel
ofaccountmanagement.

The company now focuses on supporting the top 20 accounts with

salesexecutives.Theother680+accountsaremanagedbyacombination
ofatelesalesteamandthebailiffs.

A typical fully loaded Sales Executive cost to the business was

£100,000 and there were 30 in the team including managers. Each sales
executivehandledover20customers.Thebusinesswasspendingaround
£3msupportingcustomerswhohadnointentionofbuying.Infactonly1
outofevery35customerswasworthsupporting.

Contrary to popular opinion creating a smaller Sales team increased

motivation, productivity, salary and sales. The new smaller team had a
reducedmanagementoverheadandhadimprovedtheprofitfromexisting
turnoverbyaround7%.

The Sales executives had more time to spend with each of their

customersthatmeanttheydeliveredabetterqualityofserviceandthisin
turnencouragedthecustomertoplacemoreorders.

It was true that the business had redeployed staff but by doing so it

morethanjustsecuredthejobsofallthatremained.

Thebusinesswasnowrunningmuchmoreefficiently, it has seen an

on-going improvement to turnover, and is in a much better place to
managethegrowthofthesalesteamgoingforward.

Chapter4

StrategicSolutionsPlan

Smallbusinessessufferatthehandsoflargebusinesses,asthepainof

recession passes down the food chain. Small businesses are being asked
to take drastic action, drawing up wish lists of things that need to be
completed to improve their Cash position as the banks begin to
recapitalise and ration financial support. Time is critical, focus is
paramountandastrategicsolutionsplanisessential.

Banks no longer role out the red carpet, and angel investors want to

seeifthecompaniestheyinvestedinarecapableofgeneratingfreecash
flow(FCF)beforetheydecidetoinvestanymoremoney.

The working capital cycle shown below is an integral part of

understanding a business’s capital requirements, it’s capacity to service
externaldebts,it’sabilitytosustaingrowthandit’spotentialtogenerate
freecashflow.

UsingtheCashFlowFormulatohighlighttheareasthatwillprovide

the biggest improvements in Cash flow in the shortest period of time a
strategicsolutionplancanbeimplemented.Theplanensuresthatthelife
style changes required to sustain cost management and improve long-
term business performance become embedded into the companies’
culture.

Thestrategicsolutionsplanshouldincludethefollowing;

Thedetailedcashflowevaluationhighlightingareasofconcern

A detailed improvement Solutions report detailing any changes to
thewaythebusinessneedstooperate.Thereportshouldincludeany
3rd Party Supplier proposals required, and a proposed
implementationtimetable.

No matter where your finances are today, improving Cash Flow will

helpyoutooptimiseortransformtheperformanceofYourBusiness.

Chapter5

Conclusion

Thisguidehasprovidedyouwithanoverviewofthestepsrequiredto

analyseandimprovetheCashFlowwithinyourbusiness;recentmarket
conditions have had a dramatic impact on the global markets, and as
never before the lifeblood of the cash needs to pump through your
businessesarteries.

The global economy has started to contract and is unlikely to revert

backtotheheadydaysofdouble-digitgrowth,atleastforawhile.So,for
a while it will be hard to raise a loan or equity capital, except for
companies already generating free cash flow or those with a strong
emphasisoncashcontrol.Sothekeytosurvivingtheglobalcreditcrunch
istolookforcashinyourBusiness,findit,handleitwellandlookforthe
goldenopportunitiesitcreates.

###

AbouttheAuthor:

CraigisaBusinessstrategistwithafreshmarketperspective

combiningtechnologicalawareness,deliverableexperiencewithstrong

costmanagementandleadershipskills.Craiglikestothinkofhimselfas

theengineerwhounderstandscosts.CraigholdsbothanMScfrom