How does a company with a solid turnover achieve a permanent cash flow injection without paying a cent?
We’ve written before that a business owner who doesn’t understand their numbers is likely to struggle with cash flow. In our experience, the specific reason for a cash flow problem comes to light when your accountant asks questions about your numbers that you don’t know to ask. When the answers then yield insights that empower you to implement the right strategies, the impact on your cash position can be dramatic. This article describes how a simple strategy made a huge difference to a complex company’s cash flow position.
This is the story of a business of the type that has substantial inputs, major investment in fixed assets (with short lives), significant inventory and a large and very costly purpose-built floor area. The business was successful and profitable, with excellent debt management, however the sizeable outgoings for weekly wages and monthly rent and repayments were causing lumpy cash flow.
Even though the lumps weren’t directly impacting profitability, the business owner asked us to help find a way to do things better and improve the business cash flow situation.
Our review of the invoicing process revealed that the business sent out invoices every Friday. At first glance, this appeared unproblematic – the process was well organised, scheduled into staff’s workload and always completed by the end of the day; invoices weren’t forgotten, and the business had very effective debtor collection policies.
A closer look at the billing cycle revealed, however, that weekly invoicing was resulting in payment delays of up to seven days, ie. a job completed late on a Friday was not being invoiced until the following Friday. This insight led to our recommendation to invoice daily instead of weekly, which had the immediate effect of reducing debtor days by seven days.
It’s important to note that the change to daily invoicing required no extra work or expense and simply minor reorganisation by staff of their daily tasks.
What was the outcome of implementing this simple strategy? This company, with a turnover of close to $15m, was able to inject $120,000 into its cash flow permanently, and without paying a cent.
Insight, strategy and client outcomes
The insight, strategy and excellent client outcome in this story emerged as the result of the strength of our relationship with the business owner. This is essential for productive accountant-business partnerships.
At P+Y, our conversations with our clients are often informal and spontaneous and range from business and accounting to more general topics and shared interests. The result is questions and answers that flow freely based on mutual respect and understanding, questions that may lead to insights with the potential to bring about very significant business improvements.
Your next step…
If you would like to find out more about how we can help you improve your business, please email [email protected] or [email protected] or phone 3217 5700 to talk with a member of the P+Y Team.
P+Y Accountants and Business Advisors are known for expanding the possibilities for professionals and enterprising business owners.
The information contained here is general and not intended to serve as advice. Any information supplied is not a substitute for independent professional advice. We do not warrant the accuracy, reliability, completeness or adequacy of the information or material. All information is subject to change without notice. P+Y and each party providing material displayed here disclaim liability to all persons or organisations in relation to any action(s) taken on the basis of currency or accuracy of the information or material, or any loss or damage suffered in connection with that information or material. Users are encouraged to contact P+Y for advice concerning specific matters before making any decision.
