Tuesday, 20 April 2010

Improve Cash Flow - Part 1 of 2

How can businesses improve cash flow?  There are several sources of cash for a business.  Here we look at generating cash from operations, capital expenditure and financing.

Generate cash from operations

Ways to increase cash income:

  • Find new customers, especially those who are prepared to pay in cash.
  • Offer incentives to existing customers to pay in cash.

Ways to reduce cash costs:

  • Review expenses for discretionary expenditure.  Ask if items of expenditure, such as first class travel, are really needed.  Can the business survive without them?
  • Postpone expenditure - for example, use a web-based video conference instead of travelling to a meeting.
  • Try to renegotiate large overheads, such as rent.

Generate cash from or reduce cash on capital expenditure

  • Consider delaying the purchase of new assets or extend the replacement cycle of existing assets, such as computers or motor vehicles.
  • Renegotiate the price and payment terms for unavoidable capital expenditure.
  • Consider leasing new assets or even selling and leasing back existing assets.

Generate cash from financing

  • Increasing, extending, or rescheduling bank loans is a key source of cash for businesses.  Banks will often demand assets as security and enforce strict covenants when issuing loans.  The business will need to ensure it can cover interest payments from its cash flow.
  • Some businesses 'sell' or 'factor' their customer debts.  Factoring companies will advance cash on outstanding invoices, depending upon the customer, credit terms and risk - for a charge.  This can be an expensive form of finance, and - for small businesses - a trap, as once they start factoring debts it is difficult to break out of the cycle.
  • Shareholders may be willing to invest further finance into a business if they can foresee a return.
  • Alternatively, some businesses reduce dividend payments to shareholders in difficult times to keep cash within the business. 
"It's easy to get a loan unless you need it!"

Operations, capital expenditure and financing are three key sources of cash.

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