Billowing international lead times and rising costs have pushed businesses to hold record amounts of stock, shrinking gross profit margins. In fact, in the UK alone average inventory values jumped nearly 100% from 2019-2022, while gross margin return on investment (GMROI) dropped 76%.
In these tricky times, smart cash flow management strategies are essential to bring down costs (or push profits) in controllable areas, offsetting international instability.
In this cash flow management guide:
What is cash flow in a business?
Cash flow in business-terms is the net amount of capital available to be spent by an organisation after it has made all its payments. When more money is coming in than going out, you get free cash flow (FCF), also known as positive cash flow.
A number of things can impact your cash flow, including:
- Staff salaries
- Asset maintenance
- Utility bills
- Real estate costs
Meanwhile, sales and other forms of income improve cash flow.
What is cash flow management?
Cash flow management is the process of analysing your company’s finances, predicting future changes, and using this data to guide financial decision-making.
To improve cash flow, process optimisation is necessary. This is achieved through the implementation and continued improvement of cash flow management strategies.
Cash flow vs. profitability
Positive cash flow is not the same as being profitable. In many cases, a ‘profitable’ business can still have unhealthy cash flow.
The difference is that profit exists on paper, while cash flow is cash in hand.
A business can be profitable at the end of a financial period, but still have too much money tied up in accounts receivable, customer credit, or investments and assets that the cash is inaccessible.
Why is positive cash flow important?
Accessible cash means stability, agility, opportunity, and growth. It allows a business to progress and make the purchases necessary to perform and scale with maximum efficiency.
Conversely, negative cash flow can result in missed bill payments, unhappy staff, lost customers, and ultimately, insolvency.
Cash flow functions as the impetus for your business. Without it, growth stagnates. When this happens, those competitors in the rear-view will be quick to close the distance.
Cash flow management strategies: Sales
Driving sales is not the only way to improve cash flow, but it will feel like the most direct. Sales are exciting and can happen in the background, making it a great place to start.
1. Improve profit margins
Improving profit margins is an effective way to generate additional free cash flow.
This can be done by either increasing your income or decreasing how much you spend.
Here are 10 easy ways to expand your profit margins:
- Increase your product prices
- Improve production efficiency by optimising your processes
- Create a customer loyalty program
- Improve the perceived value of your products through marketing
- Encourage customers to spend more, raising your average order value (AOV)
- Cut shrinkage and wastage in your warehouse
- Take a just-in-time approach to order fulfilment
- Trim pet projects or unnecessary expenditure
- Implement lean manufacturing principles
- Get better prices from your suppliers
Bottom line: While profitability and cash flow aren’t the same thing, high levels of net profit can directly translate into cash flow. Test different methods of earning more or spending less to increase the gap between expenditure and income.
2. Increase visibility of sales volume
Sales volume refers to the number of units your business sold within a given period. While it’s not a measure of profitability (or cash flow), sales volume is a figure that can tell you which of your products are most popular.
For sales volume to be most useful as a metric, you must have a high level of business visibility.
If you compare it with your supply chain costs, inventory costs, and manufacturing costs, you can determine which products are bringing in the most profit and which are so expensive to produce that they’re eating away at your cash flow.
Bottom line: Gaining visibility over your sales volume is the first step to improving it. Perform a product portfolio analysis to identify which products are worth extra investment and which are costing you more than they’re helping.
3. Focus on average order value
Average order value refers to the average amount a customer spends on a single order. When you increase this value, it means every sale generates more revenue which usually means more cash flow.
5 quick tips to increase average order value:
- Use free shipping after a certain price point to encourage customers to spend more.
- Offer bulk-purchase discounts or throw a 2-for-1 sale.
- Create product kits and package deals bundling products together.
- Add product upsells and cross-sells to your catalogue or website purchase screen.
- Allow customers to open lines of credit or implement a ‘buy now, pay later’ payment system.
Bottom line: It’s more cost effective to sell to existing customers than to attract new ones. Focus on attracting repeat business and encourage higher-value purchases to improve profits without needing to find new customers.
Cash flow management strategies: Inventory
Mastering inventory control will allow you to produce more goods, more efficiently, at a lower cost.
4. Shorten lead times
Purchasing raw materials locks cash into physical goods. Every moment of delay thereafter is time spent with that cash still locked away. You won’t unlock it again until you sell those goods in the form of finished products.
Improving lead times can directly improve revenue. It turns locked cash back into free cash more quickly. Free cash can then be spent on growth opportunities, upskilling, and innovation.
So, ask yourself: what’s delaying your products from shipping?
- Delays caused by stockouts
- Inefficient or unnecessary production processes
- Poor inventory control
- Slow suppliers
- Lack of internal skills
Bottom line: Lead time equals locked cash. The best way to unlock cash that you’ve spent on raw materials is to produce and sell your products faster.
5. Renegotiate with supply chain partners
Good supply chain partnerships are essential for smooth business function. But suppliers could be costing you more than they should.
Perhaps their prices are too high, you’re being forced to buy unnecessary bulk, or shipping times simply take too long (or cost too much).
Fortunately, most of these issues can be renegotiated – especially if you already have that positive personal relationship.
Here are a few terms to try and negotiate with your suppliers:
- Lower minimum order quantities
- Bulk pricing discounts
- Better pricing than your competitors
- Loyalty discounts
- On-shore distribution rather than off-shore
- Extended credit terms
Bottom line: You might like your suppliers personally, but if they’re costing your business too much money then something needs to change. Any relief you can create at the beginning of your production process is money you can save throughout the rest of it.
6. Aggressively clear stock
Holding inventory means holding cash. The more inventory you hold, and the longer you hold it for, the more that inventory costs your business.
If you’re holding too much stock and your regular sales process isn’t selling it off quick enough, you need to be aggressive in getting rid of it. Even if that means taking a short-term hit to net profits.
Here are some tactics for clearing stock faster:
- Add clearance discounts for items you’re struggling to get rid of
- Add out-of-season discounts for products customers may want again next year
- Use limited-time fire sales to generate a lot of sales quickly
- Seek affiliate partnerships (i.e., influencers) to make sales through their channels
- Bundle slow-moving items with top sellers
- Try to return (or sell) excess raw materials to suppliers
Bottom line: If your inventory is moving too slowly, it must be cleared more aggressively. This may mean you take a slight hit to profit as you sell items at heavily discounted prices, but you’ll be saving in the long run by getting rid of the excess holding costs.
7. Slim your product list
If you’re aggressively selling slow-moving stock but inventory keeps building up or your sales order volume analyses reflect a lot of laggards, the problem may be the number of products you’re trying to sell.
Slimming down the amount of different items you’re making and selling will allow you to focus your efforts on fast movers or top sellers, improving production and cost efficiencies.
Below are two methods for identifying fast- and slow-moving products.
An FSN analysis is the segmenting of your raw materials inventory into three categories:
By comparing quantity, consumption, and sales figures, you should be able to determine which items you actually need, which you could live without (or find an alternative to), and which are dead stock.
SKU rationalisation is looking at a product’s cost efficiency by using its SKU code.
SKUs help to give you a complete picture of a product’s life cycle. You can use them to track the cost of a product all the way through production into sales and shipping.
Comparing these figures will give you an idea of the profitability of each individual product in your business. Use this information to determine which products to discontinue, and which to focus on in future.
- Learn more: What is SKU? A complete guide to Stock Keeping Units
8. Connect inventory to sales
Quite a few of the items in this list require you to check both sales data and inventory. This is a common theme in modern manufacturing – gone are the days of doing things by gut feel.
The proof is in the numbers. And the more numbers you have access to, the better business decisions you’ll be able to make.
So how do you connect inventory and sales?
- To get visibility over inventory: You need inventory management software. This will grant better vision over the entire production process.
- To get visibility over sales: You need a modern CRM platform – even better if it’s a stock-aware CRM. A stock-aware CRM can track quotes and inventory, and even forecast stock as it relates to customers.
Bottom line: It’s difficult to figure out the relationship between inventory and sales if you don’t have an interconnected system. Modernising both ends of the product pipeline with data-driven software will allow you to calculate precise cost information about your business.
9. Trial a hybrid purchasing model
When it comes to just-in-time (JIT) vs. just-in-case (JIC) inventory strategies, you don’t necessarily have to choose one or the other.
A hybrid purchasing model (also called a hybrid push-pull inventory system) is one where you’re capable of ordering excess stock in some areas, while ordering just-in-time for others. The benefit of this model is that it balances the cost efficiencies of JIT with the certainty of holding excess inventory.
To successfully trial a hybrid purchasing model, you’ll need to ensure you have an inventory management system up and running. You must get clear on real-time inventory levels, to-the-minute inventory costs, and expected future demand.
Then you can set intelligent reorder points and minimum stock levels, and adjust them over the course of a year, to ensure you have the right stock in the right place at the right time.
Bottom line: JIT strategies can cut costs but come with risk. JIC strategies reduces risk but increases costs. Balancing both could allow you to trim fat while maintaining a safety blanket. This can only be achieved with intelligent inventory analysis and real-time inventory management.
10. Look for hold-ups in your BOM
Production hold-ups often begin in your Bills of Materials.
If 9 out of 10 of your product ingredients can be sourced locally and instantly, but the final ingredient comes from overseas, you’re always going to be held up by that one ingredient. That means you’re paying to store nine ingredients waiting for just one.
So, one process to consider as you look to cut costs and improve cash flow is to rationalise your Bills of Materials.
This is the process of:
- Analysing your BOMs to check for potential future hold-ups
- Ensuring all parts of your BOMs can be sourced cost-effectively
- For materials which will cause future problems, check for substitutes
If you’re using a hybrid purchasing model, you might consider utilising JIC for problematic ingredients and JIT for everything else.
Bottom line: Holding inventory while waiting for a particular ingredient locks cash just like any other hold-up. Rationalising your BOMs will help you pinpoint where those problems are likely to come from, and either prepare for them in advance or substitute to avoid them entirely.
Cash flow management strategies: Credit control
Another area where you might have inaccessible cash is late invoice payments. You can have the most efficient processes in the world, but if customers don’t pay on time, then you can’t get your money back.
These strategies should help you get those invoices moving again.
11. Offer prompt payment discounts
Prompt payment discounts are certain percentage discounts offered to customers who pay their invoices not only on time, but early.
If you can afford to trim a little off the top of your product pricing, offering prompt payment discounts is a quick way to incentivise customer payments without a lot of effort on your part.
There are two types of discounts to consider:
- Static discounts: If customers pay by X date, they receive a Y% discount.
- Dynamic discounts: As above, but there are multiple tiers of discount on offer. For example, if a customer pays within 10 days they receive the biggest discount, within 20 days it’s slightly smaller, and beyond 30 days it’s the regular price.
Bottom line: Other businesses are trying to save money too. If you can afford to offer a discount, use this to your advantage by cutting your price for anyone willing to pay quickly.
12. Late payment enforcement
There will likely always come a time when customers simply don’t pay. The deadline comes and goes, and you don’t see any money. As a result, your cash stops flowing.
You’re not powerless when it comes to enforcing invoice payments.
Here are a few methods for getting customers to pay on time:
- Ensure each invoice has a clear payment deadline. This will help establish a timeline for when you can begin to follow up.
- Send reminders. As the deadline approaches, hits, and then passes, send reminders to the relevant customers. Emails are sufficient at first, but phone calls are often more effective.
- Send a letter of demand. This will be a formal letter demanding the overdue payment, written and approved by your legal team. Letters of demand often threaten further legal action if payment isn’t received within a certain time frame.
- Hire a credit controller. Credit controllers are experts in chasing down unpaid debts; they’ll likely do a better job than untrained employees in a faster time.
Only consider lodging a claim at your local tribunal, suing, or the equivalent appropriate legal action in your country after trying all of these methods.
Bottom line: You shouldn’t fear escalating an invoice to save a customer relationship. If they’re not paying you, they’re probably not a customer that’s worth saving.
13. Encourage pre-payments
Avoid the issue of late payments entirely by encouraging pre-payments. Pre-payments are simple: When a customer knows exactly what they want and how much it will cost, they pay in advance for their products.
The benefit here is immediate. You regain instant access to your cash, allowing you to reinvest it in your production process or other areas of growth.
You may consider part payments instead. Ask for half up front, and the other half upon delivery.
This would also allow you to accept up-front payments for products with an uncertain cost; the customer lays down their deposit, then you work out the final total upon delivery and they pay the rest.
Bottom line: Getting paid up front gives your business access to its cash again far more quickly than traditional payment-upon-delivery models. It can also reduce the risk associated with selling to brand new customers, or customers with very large orders. If there’s a problem down the line, you at least received some if not all of the money already.
14. Consider quantity price breaks
If you know you’ll need extra inventory, purchasing larger quantities is a great way to cut some of the cost. Bear in mind: holding extra inventory comes with additional storage costs.
Your own customers may be looking for the same thing. Offering discounts for buying above a certain quantity can encourage customers to increase their AOV.
Like prompt payment discounts, you can offer either a static discount (orders above X value receive Y% discount), or dynamic discounts (tiered discounts based on size of order).
Bottom line: If you’re selling in bulk to customers or want to increase average order values, determine if you can afford quantity price breaks to encourage customers to spend more.
15. Perform credit checks on new customers
Credit checks are a way to identify someone’s ability to pay their invoices. If a potential customer has poor credit, they could be a risk (especially if they’re asking to order in bulk).
But credit checks aren’t a yes-or-no thing. You can still sell to a customer with poor credit; you just need a more carefully written agreement.
To establish trust, for example, you can start small and work your way up or demand advance payments to ensure your business receives what it’s owed before paying to produce the order.
Bottom line: It may seem like an extra cost, but if you’re establishing a new relationship with a customer then requesting a credit check could save you a lot of time and money. If you see a partner has poor credit, consider establishing stricter payment terms.
16. Investigate invoice financing for short-term cash
Your business may be able to secure a loan using pending invoices as collateral. This is known as invoice financing (or debtor financing). Invoice financing gives you access to a short-term cash boost by using an invoice as security.
Invoice financing is not something every business should consider.
- The main advantage: It’s more expensive than a regular bank loan, so you’ll lose some money.
- The main disadvantage: It’s a lot faster than a regular bank loan.
You wouldn’t normally secure a loan against an invoice that you don’t expect to be paid. Invoice finance isn’t a replacement for debt collection – the lender will expect their money back, which is meant to come from the invoice payment.
Bottom line: Invoice finance is a way to create short-term free cash flow immediately while waiting to get paid by a customer. When used strategically, it can give the business access to cash flow that would otherwise stay locked up.
Cash flow management strategies: Business strategy
Finally, there are business-specific strategies which will help you get clear on your operational costs, potential income and future uses for cash flow.
17. Get on top of your business
As your organisation grows over time, it’s easy to forget where you came from. You lose sight of the problem you’re trying to solve within the market, who you’re solving it for, what it’s going to cost to achieve that goal, and how long it should take.
Understanding your business basics can be a good way to refresh yourself, review your business, and determine if you’re still following the plan. This may help you spot pet projects and unnecessary extras that aren’t helping your goals.
Bottom line: Your organisation should have clear direction and good visibility over its costs (compared to what it should be costing). Refresh yourself on these basics and you’ll be able to determine if the ship is sailing in the right direction or going off course.
18. Learn to forecast
Inventory forecasting is the process of predicting customer demand as it pertains to stock requirements.
If you know how many customers to anticipate, how many units you’ll likely ship, and what sort of income you’ll receive, you can ensure you have the right people and inventory in place to meet that demand.
Accurate forecasting will help you sail through the busy season without stocking out, and go lean during quiet seasons so as to avoid wasting money on overstocking slow-moving items.
Use the right mix of experience and analytical software. Look at historical patterns and compare them with forecasted trends to predict what’s likely to happen again.
Bottom line: Business leaders who can see the future are better able to ensure they have the right resources in the right place at the right time, whether that means filling your warehouse with inventory or clearing it out.
19. Minimise operational costs as much as possible
If cash flow is a major concern for your business, trimming the fat from your processes is a necessary step.
There’s little point putting all your effort in improving order values, investing in inventory management software, and forecasting future demand if you keep bleeding money out through your operational costs.
Trimming costs can be a whole-of-business change, so you’ll want to communicate with your entire team that you intend to review the business top to bottom, looking for inefficiencies. You’ll likely be changing equipment, removing things, changing premises, retraining current staff, and hiring new employees.
Some questions to consider:
- Does your business subscribe to any ‘nice-to-have’ but unnecessary services?
- Can you negotiate better prices with your suppliers?
- Do you need to change suppliers entirely?
- Do you have multiple loans that are costing you money? Could they be consolidated?
- How much are your overheads costing you each year?
- Are you producing goods as quickly as you should be?
You might find that to save money you need to spend it by upgrading old machines or upskilling staff. Weigh in the total costs and consider how upgrades and new purchases will affect your cash flow before making any decisions.
Bottom line: As your business grows, it’s likely you’ll start to accumulate unnecessary hidden operational costs and excess overheads which restrict cash flow. Take time to review these costs on a regular basis.
20. Grow strategically
While business growth is generally always the goal, too much too quickly can be a bad thing – costing you money, rather than making you more.
You can overextend yourself by creating more costs than you can cover through sales.
To achieve healthy, affordable growth you should create a growth strategy.
A good growth strategy covers:
- New market opportunities to capitalise on
- Your financial goals for the growth period
- A breakdown of what it will cost to expand
- A breakdown of any extra needs, such as staffing, logistics, and equipment
This will help you determine what impact your cash flow is going to suffer to grow, and for how long you can expect that impact to last before turning a profit again.
Bottom line: Growth can cost a lot of money. If you haven’t planned out the financial impact of business growth and how long it will take to turn a profit in a new market, you may suffer more of a loss than you can handle.