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Where Did All The Cash Go?

By Stuart Morley |

When we ask clients, "Where did all the cash go?" The usual answer is, "I don't know. Ask my accountant, bookkeeper, banker etc."

The harshest lesson in business is learning that ... the only person who cares about your cash is you, the business owner. So pay attention. This may be the most important article you ever read!

There are many places and ways to get cash for your business. However depending on the type of cash, the cost and time to free up the cash can be expensive.

If you look at the diagram, you can see we have eight drivers of cash flow that can either hurt or help you. Find the cheapest and quickest way to get cash into the business.

1. Cash on hand

The first driver is looking at the cash on hand. This typically means two things:

  1. Banking the cheques that come in the mail from customers as fast as possible. It is amazing how many companies delegate the banking activity to staff without checking to make sure they bank all cheques received, on the day the cheques are received. By the way depositing cheques at the cashier results in funds in your account immediately whereas ATM deposits can take 24 hours to process.
  2. Coming up with strategies to delay paying your bills. Some suppliers will give you longer than 30 day terms if you call and make arrangements.

2. Working capital

The second driver that can help your cash flow situation is working capital. There are four effective ways of improving your working capital situation:

  1. Chase receivables, which means, politely calling customers to get payment.
  2. Get your quotes and estimates out to customers quicker.
  3. Get the invoicing up to date.
  4. Deal with customer complaints that are holding up payments from customers.
  5. Sell obsolete inventory for a discount to generate quick cash.

3. Discretionary costs

The third driver is discretionary costs, which are costs that can be eliminated or postponed without hurting the business in the short term. Discretionary costs often include advertising, preventative maintenance and travel.

4. Margin growth

The forth driver is margin growth. The quick fixes here are:

  1. Increasing pricing for products and services. If you have a good business, increasing prices often results in more not fewer customers.
  2. Getting rid of unprofitable (needy) customers who take for ever to pay.
  3. Get payments upfront from customers.

5. Asset productivity

The fifth driver is asset productivity. This involves:

  1. Selling surplus machines, vehicles and other assets not critical to the business.
  2. Making sure the machines are generating cash for the business and not sitting idle most of the time.
  3. Upgrade assets, not because they are pretty or shiny but because they are a better cash machine generator for the business.

6. Debt

The sixth driver is debt. This can be more than asking the bank manager for an operating line. Other debt that can help generate cash includes:

  1. Leasing versus paying cash for assets.
  2. Suppliers providing extended terms.
  3. Loans from family and friends.

7. Equity and government grants

The seventh driver is equity and government grants. The most common forms of equity are:

  1. Equity from investors.
  2. Equity from managers and employees.
  3. Mezzanine financing ( which is a hybrid of debt with equity).

8. Acquisitions

The eighth driver is acquiring other businesses to achieve a better cash flow. For example we recently helped a business with free cash flow or EBITDA (earnings before interest, taxes, depreciation and amortization) of $1 million to buy a competitor with an EBITDA of $300k. So the combined business would have an EBITDA of $1.3m. The benefits were:

  1. The buyer needed to only add five of the ten employees increasing the EBITDA by $300k.
  2. The seller wanted $1 million for his business, but the buyer was only required to pay $50k in cash on closing – the rest was an earn out over four years.

Next time you face a cash crunch. Don't freeze. Pull out this article and work through the drivers.

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