Stagnant Cash Flow? How to Turn the Tide

Cash flow is the lifeblood of every business. However, I’ve found many leaders do not consider how their decisions and actions affect their organization’s profitability and cash flow.

Several mistakes that negatively impact cash flow include:

• Not raising prices often enough
• Discounting rates too often
• Inefficient processes that thwart productivity
• Lack of quality control, resulting in rework and wasted materials
• Not cracking down on overdue receivables
• Failure to negotiate favorable pricing and payment terms with suppliers

A Path for Putting Cash Flow on the Right Track

Awareness, visibility, and accountability for cash flow — at the leadership level and throughout the organization — are essential. But organizations often don’t know where to begin.

Fortunately, the EOS^® 8 Cash Flow Drivers™ tool exists to guide the process. It provides a practical framework for not only identifying and examining the factors that affect cash flow but also for giving individuals in the organization responsibility and accountability for initiating positive changes. By using the tool and following the process below, you can effectively increase your organization’s cash flow and strengthen its bottom line.

Steps for Leveraging the 8 Cash Flow Drivers Tool

1. Identify what directly impacts your profitability and cash flow. You’ll likely end up with a long list, but you need it to be manageable. Narrow it down to the six to ten drivers most worthy of attention.
2. Assign an owner to each cash flow driver.

3. Facilitate agreement on measurable goals for each driver.
4. Create visibility for each cash flow driver in your financial documents (budget, income statement, balance sheet) or on a weekly scorecard for each driver where each responsible party identifies the actions their department will take to accomplish the agreed-to goals.
5. Train everyone in your organization on how each of these cash flow drivers impact your organization’s profitability and ability to invest in long-term growth. Then create long-term opportunities for every team member who wishes to grow to take part in your efforts to improve cash flow.
6. Relentlessly drive positive progress on each of the cash flow drivers and don’t let up until you meet your goal.

Cash Flow Considerations

Keep a few things in mind as you work toward your cash flow goals.

1. The Power of Pricing

Many business leaders don’t realize how dramatically raising prices or offering discount pricing impacts their gross profit.

You can retain your gross profit margin even when your sales drop if you’ve raised prices to offset cost increases. For example, suppose you have a gross profit margin of 30%. By raising your rates by 10%, you can sustain a 17.5% drop in sales without decreasing your gross profit margin.

If you offer price discounts, you must acquire significantly more sales to retain your gross profit margin. For instance, to maintain a gross profit margin of 30% after discounting your rates by 10%, you would need 35% more sales.

2. The Power of 1%

Even a slight improvement in cash flow can go a long way. A mere 1% increase in revenue and/or 1% reduction in costs can profoundly affect net profit.

3. Sales Equivalent of a Cost Savings

A cost savings will have an exponentially greater positive impact on cash flow than an increase in sales. The example below shows a $10 million business with a 10% net profit. It would need to generate $1 million in new business to generate the same cash flow associated with a $100,000 cost savings.

Potential Strategies for Increasing Cash Flow

Improving cash flow is a matter of embracing opportunities to boost revenue or decrease expenses.

• Raise prices
• Minimize sales discounts
• Reduce overhead expenses, such as rent, real estate taxes, commercial insurance, employee benefits, subscriptions, administration, sales
• Negotiate better prices from vendors and suppliers
• Discuss extended payment terms with vendors and suppliers
• Improve how efficiently you use labor and materials — e.g., automate processes, reduce, rework, hold a Lean/Kaizen event to work through strategies
• Reduce tied-up working capital – e.g., decrease accounts receivables (especially those over 90 days), offer cash discounts

Your Cash Flow Is Within Your Control

There are always ways to improve profitability and cash flow. When someone tells me they have no control, I don’t buy it. By looking closely at your organization’s spending and pricing practices, you’ll discover opportunities for making changes.

You can approach your landlord about lowering your rent, appeal for reduced property taxes, negotiate with suppliers for more favorable pricing, or charge more for your products and services. Even slight changes to these things and others can make a tremendous difference.

If you’re stuck and need help moving your cash flow in the right direction, let’s talk — schedule a 15-minute discovery call.