5 Ways To Improve Your Cash Flow

By Toby Smith

 

As a successful manager, you’re well aware that the survival of any business – regardless of size and profitability levels – ultimately depends on cash flow. Most businesses that end up in liquidation reach that point because they run out of cash.

This article outlines a number of measures you can implement to achieve sustainable cash flow improvements. Even if cash flow isn’t a major concern for your business, following these steps can help you to free up capital to invest in infrastructure improvements or growth opportunities.

 

1 – Regular financial reviews

Having detailed and up-to-date knowledge of your financial performance is critical. If financial management isn’t your strength, engage a strong finance team to advise you, and ensure they maintain a steady focus on cash flow and profitability rather than growth rate.

Your schedule should include a monthly analysis of your financial statements, looking not just at your current financial status, especially your free cash flow, but also at past performance (your trends and trajectory, particularly your profitability ratios and return on capital employed (ROCE)) and at forecasts for the immediate and longer-term future.

Regularly drill down and examine the financial performance of each of your product or service lines and sales channels, as well as your stock levels, debtors and assets.

This information will help you to make informed strategic decisions about your operations and enable you to identify potential issues in time to take corrective action to protect your cash flow. For example:

  • Organising short-term finance to cover working capital shortages
  • Matching the timing of expenditure to income if you have fluctuating income (by delaying discretionary purchases or negotiating with creditors)
  • Adjusting your stock policy if you’re tying up cash in excess inventory (be wary, for example, of buying extra stock to take advantage of vendor discounts or rebates, as savings can quickly be lost to storage costs)
  • Tightening up your credit terms or collection policies if too much cash is tied up in bad debts, and imposing purchase restrictions until debts are cleared, or even ending relationships with clients that have a poor payment record.

 

2 – Regular strategic reviews

Unfortunately, for many businesses, a strategic plan is something that’s created once then either forgotten or followed rigidly without review. As a result, precious cash gets tied up in obsolete stock, irrelevant marketing campaigns, bad debts and unnecessary assets.

To stay competitive and keep your cash flowing freely you need to regularly re-examine every aspect of your business to make sure that your:

  • Product lines or services still meet your customers’ needs
  • Sales channels are aligned with your customers’ preferences
  • Marketing initiatives are successfully attracting new customers
  • Technology and equipment are appropriate for your needs (it can be tricky to find the balance between staying efficiently up-to-date and not wasting cash on unnecessary upgrades).

Being willing to change direction and redefine your strategy – including making tough decisions on the future of product lines, sales channels, marketing strategies and assets that are draining your cash flow – is critical to long-term success.

 

3 – Cautious growth

One of the main reasons companies run out of cash is that they grow too fast.

The risk is that in order to meet the demands of new customers or clients, you’ll have to invest heavily in infrastructure, materials or labour. That up-front investment can wipe out your working capital reserves and leave you dangerously exposed until you receive the funds from the extra sales.

If you don’t have the cash to meet your financial obligations in the meantime, your business may not survive to reap the benefits of that sales growth.

Focus instead on steady, cautious growth that won’t exhaust your cash reserves or stretch your resources to the point where your service levels (and reputation) will suffer. And be very wary of funding growth with borrowings, especially when interest rates are rising.

 

4 – Prudent borrowing

Loan repayments can be a major drain on your cash reserves, and unless you’ve locked in fixed interest rates you’re always at risk from rate increases that can play havoc with your forecasts and quickly deplete your cash reserves.

The most important measure you can take to minimise your cost of borrowing is to make sure the term of your loans match your business needs:

  • Never use short-term facilities like an overdraft or credit card to finance the purchase of long-term assets. Not only will you pay higher interest rates and charges, you also run the serious risk of having the facility withdrawn before the asset is paid off – leaving you with an instant cash flow crisis.
  • Avoid using long-term funding to boost your working capital. Many long-term loans have penalties for early repayment, which can you leave you locked into paying for finance you no longer need. Instead, opt for at-call finance to smooth out fluctuations in your cash flow, so that you’ll only pay interest on funds when you need to draw on the facility.

Shop around for business finance, especially if you need a fast cash injection – the ‘fintech’ alternative loan market is booming in Australia, offering a competitive source of funding for businesses of all sizes. Be aware, though, that alternative lenders aren’t regulated in the same way that Australian banks are, and some may seek to impose restrictive loan conditions in order to reduce their risk.

 

5 – Putting your cash to work

While most cash flow improvement measures focus on finding ways to increase cash reserves, it’s actually possible to have too much cash, earning negligible interest and leaving you with poor ROCE.

If you do happen to have large cash reserves – more than you need to meet your working capital needs, fund your loan obligations and cover an extended downturn in sales – you may want to consider reinvesting those funds in your business.

One way you can use excess funds to improve cash flow is to repay loans (if you can do so without incurring penalties) since the interest you earn on your savings will never match the amount you’re paying on your borrowings.

Being decisive and winning the dog fight

Written by Paul Mead – Performance Consultant, Paul Mead Consulting

As leaders, we understand that having a strategy is an essential part of success. But a strategy without action is just a pretty piece of paper. The strategic leader needs to be able to turn this plan into action, understanding how it is to be used in the current environment and bring along the rest of the organisation with them.

 

According to some recent research, an adult makes up to 35,000 decisions per day. Many of these decisions are minor impulsive type decisions (we make over 200 decisions each day about food choices), but others, especially for leaders are critically important ones. So, as leaders, how do we take decisive action when it is required?

 

As an ex-New Zealand Army Officer, I like to look towards my military education to find insights for leaders. One lesson that has stuck with me and rings true for strategic leaders of all persuasions is the OODA Loop.

 

Colonel John Boyd, a US Air Force Fighter Pilot introduced a concept in the 1950’s called the OODA Loop. Observe, Orientate, Decide, Act.

Paul was the National Winner of the 2016 ALEAs Emerging Leaders award

Col. Boyd noted in the Korean War, that despite the US aircraft being less maneuverable than the Russian made MIG’s, they were winning the majority of the dogfights.

Part of the reason being, the US F-86’s had a better field of vision and hydraulic controls that enabled faster maneuverability. This ability to observe and then orientate themselves faster, meant they could disrupt the actions of their enemy.

He emphasised to his pilots the need to observe and orientate faster than their enemy in order to make superior decisions that ultimately would save their lives.

This concept of the OODA loop can be directly applied to the process that exceptional strategic leaders display, in taking decisive action around those important decisions, within the 35,000, they make every day.

 

Observe – The strategic leader is constantly observing the environment in which they operate. They can identify what is a risk to their organisation and where opportunities to exploit lie.

 

Orientate – The strategic leader orientates their organisation into a position to either mitigate the risk or take advantage of the opportunity.

This ability to orientate the organisation should not be underestimated. This is where the strategic leader earns their title. A failure to correctly orientate will spell disaster in the next two stages.

 

Decide – The strategic leader is decisive in their decisions. They know when they have enough information and when the timing is right to take action. They decide on a course of action and launch into it with full force.

 

Act – The strategic leader acts at the right time, always. Their action is well planned and they have contingencies in place for when the situation changes. Success is likely, rather than as a consequence of luck.

Strategic leaders know that the ability to orientate their organisation takes more than charisma. It takes the ability to clearly communicate the need to implement change or transform a business process through a clear vision. This vision is built upon observation that is rooted in research, analysis, experience and gut feelings.

When it comes time to make the decision, the strategic leader has motivated their team to adopt the vision as their own, knowing that the challenge is to ensure that the odds are stacked clearly in their favour. The strategic leader knows that their tactical leaders have the information they require to influence, lead and win their dogfights, contributing to the broader strategic plan.

 

This is the art of strategic leadership, one dogfight at a time.

Paul will be one of many speakers at our upcoming Brisbane Conference on the 2nd November 2017. Book Now to hear Paul and many other specialists in their respective fields discuss attributes of successful leaders at this full day event.

 

A Vision Splendid

 

When Starbucks lost its way it had to come up with a whole new recipe. By Fiona Smith

 

When you order a grande chocolate chip frappuccino at Starbucks, you know exactly what you will be getting – a lot of calories, some free Wi-Fi and a friendly chat with the staff, who may amuse you by misspelling your name on your plastic cup.

It is this reliability that helped make the US cafe company one of the world’s most successful retail chains, but nine years ago, Starbucks was ready to implode. The company had over-reached in its ambitious expansion and was forced to close about 900 stores worldwide.

In Australia, which never embraced Starbucks as enthusiastically as other countries, 66 shops were shut down – leaving only 23.

Stepping back in to the CEO role after an eight-year absence, chairman Howard Schultz sought to reconnect the company with its vision and mission statement, which was: “To inspire and nurture the human spirit – one person, one cup and one neighbourhood at a time”.

Schultz explained at the time that the company had become too focused on the money and had lost sight of the people.

Starbucks’ turnaround is now the stuff of corporate legend. Reversing from the brink, Starbucks last year posted record-high profits of $US2.8 billion on revenues of $19 billion.

Shultz has said an integral part of the recovery was his decision to stage the company’s 2008 conference in New Orleans, which was still struggling to get back on its feet after the devastating Hurricane Katrina three years earlier.

About $US30 million was spent taking 10,000 store managers to the city, starting their conference with community service – building, painting and cleaning for the residents.

“I went to New Orleans because I knew that if I could remind people of the character and the values of who we have been, by starting the conference, not with the conference, but 50,000 hours of community service, that we would make a difference,” he said in an interview in the Harvard Business Review.

“And if we didn’t have New Orleans, we wouldn’t have turned things around. I’m convinced of that. It was the most powerful experience that any of us have had in years, because it was real, it was truthful, and it was about leadership.”

For all the cynical commentary that often surrounds discussions about company vision statements, aligning an organisation with a higher purpose can be a powerful business strategy, says Sydney-based consultant Alan Riva, who uses the concept of ‘purpose’ to grow businesses.

“It’s the glue that holds everything together,” says Riva, pointing to a study of 50,000 brands that found that the 50 highest-performing businesses were those who centred their businesses on the ideal of improving people’s lives.

These companies grew three times faster than their competitors and were 400 per cent more profitable than the S & P 500.

“This is a beautiful piece of research. We have these shining stars of businesses that show that purpose and vision are what really helps galvanise a business,” says Riva, who consults for companies such as yoghurt maker Chobani, BUPA and CoreLogic RP Data.

But not all visions are created equal. The author of that research, former Procter & Gamble global chief marketing officer Jim Stengel, says some are too short-sighted to inspire anyone.

“Does a shared goal of improving people’s lives sound, well, too idealistic for the rough-and-tumble of business? What about practical, hard-nosed goals such as making the quarterly numbers, increasing market share, and cutting costs?” Stengel asks in his book GROW: How Ideals Power Growth and Profit At The World’s Greatest Companies.

“All are crucial, but the best businesses aim higher. When many business leaders articulate mission and vision statements, they typically talk about having the best-performing, most profitable, most customer-satisfying, most sustainable, and most ethical organisation.

“Strip away the platitudes, and these statements all aim too low.”

Such lack of ambition is a “recipe for mediocrity,” he says. Instead, the core beliefs of a business should be linked to fundamental human values that remain relevant through all sorts of business cycles and changes in strategy.

So, a vision should be “visionary”, but it also needs to connect to winning in terms of a customer or market, says the national leader of strategy consulting practice, Monitor Deloitte, Jeremy Drumm. If the customer or market are omitted, then employees are left to rally around products and services. “And that never inspires and is really a poor war cry,” he says.

 

“A strategy is only good if someone else is doing the exact opposite. In order to win in a market, there must be somebody else doing something differently.”  – Jeremy Drumm, Monitor Deloitte

 

Another principle is that the vision should be broad enough so it remains relevant over decades.

Walt Disney’s simple vision – “To make people happy” – is open-ended enough to accommodate expansion into new businesses.

“If they had gotten really detailed and gone down a path [in their vision statement] of winning in animation, that would have been quite limiting and wouldn’t have seen them go into amusement parks or ships,” Drumm says.

 

Drumm uses the term “winning aspiration” to describe an organisational vision, but other commonly used terms are credo, manifesto, statements of intent, mission and core ideology.

Swedish furnishings company IKEA explains its vision (with a charming, slightly Scandinavian syntax): “At IKEA our vision is to create a better everyday life for the many people. Our business idea supports this vision by offering a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them.”

Microsoft keeps it short and simple: “Our mission is to empower every person and every organisation on the planet to achieve more.”

Some companies with enlightened-sounding aspirations today had more blood-thirsty rallying cries previously. US footwear company Nike had “Crush Adidas” as its 1960s motto, but now says its mission is “To bring inspiration and innovation to every athlete in the world”.

Responsibility for coming up with a vision varies from company to company. It can be dictated by a founder or CEO, it may involve consultants and, sometimes, it is a lengthy process of harvesting and distilling the views of every employee.

Drumm’s view is that it’s the CEO’s role to define and express the “winning aspiration”. “You don’t want to spend money and waste too much time on getting the perfect language around a vision statement, but if you don’t have one, then you don’t have a North Star and all the choices that you make underneath that will be unfounded … which is a horrible place to be because you will spin your wheels and waste more money.”

When a vision is in place, it should be relatively stable, underpinned by strategies that may change frequently, says entrepreneurial strategist, Paul Broadfoot.

“If you’re going to turn something around, a vision helps. Sometimes, it’s not until there’s a dramatic need for a turnaround that a vision gets renewed, or a strategy is linked more to a vision,” says Broadfoot, author of the Xcelerate book.

“The best businesses have both a strong vision and a strong strategy and that they have developed together.”

Drumm starts the strategy conversation by asking: “Where do you play?” and “how do you win?”

The first question examines the value of particular markets, customer segments, and sets of products and services.

“Those are pretty meaty questions but if they’re not answered in the context of the [vision], they won’t resonate,” Drumm says. “They are the essence of how you set strategy.”

“Those are the hardest questions you could possibly answer. They need to be mutually reinforcing and to align with your winning aspiration.

“And a strategy is only good if somebody else is doing the exact opposite. In order to win in a market, there must be somebody else doing something differently – either in that market, or in a different market in the same way.

“Otherwise, you all just fight and the prices go down and it’s a death spiral.”