The Principles Of Poor Cash Flow

ACCOUNTS RECEIVABLE PROCESS – The time between debtor days and banking – that time will stifle out cash flow. There are many things and strategic things that we can do to minimise those debtor days, including typing up our terms of trade, our prompt payment discount and streamlining the billing process.


Regarding those debtor days, how do we know what is too high and what are the indicators?

We talked last time about basically sending an invoice out at the end of the month and then they pay us on the 20th of the following month. So that should take about 20 days. But if we send out an invoice at the beginning of the monthly payment on the 20th of the following month then that’s probably going to take about 50 days. Between 50 and 20, the average is somewhere around 35, generally speaking, depending on your industry, but if we just go across the board 40 days is good and 60 days is bad somewhere in the middle is good and a little calculation can work that out.

If you just basically think to yourself how much do I sell in a year, it might be 1.2 million and then how much have I got sitting in my receivables, it might be 100,000. Therefore, you can pretty quickly see that your debtor days 100,000 over 1.2 million is probably one 12th of the year which is surprisingly enough about 30 days!

It’s exciting having client’s coming on board but when do we actually see the cash flow? I’ve asked this particular client to go back and measure the gap between excitement and what I call reality. It’s not the same as debtor days – this is how long it takes for the salesperson to go Yay and the Accountant to go Yay! In the customer’s case, it could be 30 to 60 days simply to sign them up, so we are really excited but hang on, it’s taken 60 days to get the cash. That’s the whole concept around making sure that we focus on banking the sales rather than just making the sale.


What do you think about offering payment discounts?

I am definitely not a fan of discounts; I’ve been known to regard that as a four-letter word! In terms of cash flow, a lot of people will probably receive a discount, like your power bill if you pay on time. If your overdraft is costing you a very small amount of interest, which is currently probably is, offering someone a discount to pay quicker is probably not that clever as it’s not actually costing you much while you’re waiting for them to pay. If interest rates turn around, and they will at some stage, then a different logic will need to be applied.


Where do we start with streamlining the billing process, assuming our clients all started on different days?

Software. A lot of our customers use Xero, making it particularly easy for people to send bills straight away, set different due dates and automated follow-ups. It’s only as good as the user though, those reminders Xero sends you, you need to act on those. It’s not 100% a saviour, and other products are doing largely the same thing. The only thing that I have ever seen work nearly 100% of the time is someone picking up the phone, it’s personal. You can judge a situation and work out together how the payment will work.


Anything else on the Accounts receivable process?

I think the key thing to start measuring is your debtor days, if you know that there is a long wait it may force you into shortening it, which is good because otherwise, you tend to not care and go on your day. Stay on top of things – communicate. For example, if you have an Inland Revenue bill and you can’t pay it, don’t ignore it, communicate and drip feed them when your cash flows a bit tight. This also protects your reputation, New Zealand’s a very small country so you don’t want to lose your reputation in a market just because you haven’t been able to communicate with someone.


In terms of budgets, this is referring to department budgets and business budgets and so forth, having that structure in place is so important isn’t it to help the APC process keep in line.


Yes, it gives us an idea of when cash is going out and coming in. I look at budgets as being almost like that little birdy on your shoulder just letting you know every now and again that you are under or over and should you be spending this or saving? Every month we should be looking at what’s called a profit and loss and we should be saying right what we have spent on this particular expense, what was our budget, are we up, are we down? What can we learn from this for next month? As owner or manager of the business, the onus is on you to manage the budgets, having a strong team around you with the right tools to enforce these even better.




How do you impose late payment penalties?

Carrying stock for too long means full shelves and an empty bank account and this is no different if you’re a service provider with work in progress that is yet to be billed. Reviewing your stock ordering systems and stock control processes (to name a few) will identify strategies to ensure cash hits the bank sooner. This is a fine balance; a process is needed.


Is it a forecasting matter or is it looking at previous sales or stock on hand levels? Do we need to factor in the current market and then how do we realign our processes to this?

You need to get the balance right, that is really important. If it was a Japanese car manufacturer and they had a warehouse full of car batteries gathering dust. We’re only using a few each day so I’d be thinking why don’t we talk to the battery manufacturer and supplier and organise a just in time service. So, they minimise the amount that they had to carry in that great big warehouse and guess what would happen to their bank balance? It would increase because all the money they had sitting in that warehouse is now sitting in their bank account. With that cash they can buy better batteries and have more people making more cars so cash can start moving into the working capital cycle, starting to actually generate profit. So, it’s working out how many they need so they don’t run out, but they also don’t gather dust. That balance we talked about.

Now, what about a service industry?

Honestly, they’re the worst. They do all this work upfront, it’s going so well, but the reality is they are not getting paid, and this thing called work in progress is building and building and building. We have all this work but no cash. In this case start doing little bills, Bite-Sized chunks. Keep an eye out for shrinkage, we know that all of our team members are wonderful, we trust them, but just keep an eye on it as it does happen from time to time. Make sure that you did buy 10 of those things and if you only produce 9 things with it, where’s the other one?



Often significant cash flow and interest charge improvements can be achieved with a regular review of existing debt. Maybe your debt/capital structure could be improved, or perhaps your debt should be consolidated and paid off over a longer-term. Maybe you need to review and adjust what you’re drawing from the business, or perhaps the business needs a capital injection to fund its growth. Match the life of your asset to the life of your borrowing, think about how many people can go out tomorrow and buy a house with cash, it’s unlikely.

For example, a person just went into business and he may want to buy a $30,000 printer for graphic design, so they just went and bought it and they used their overdraft to pay for it. What’s wrong with that? Unfortunately, that $30,000 is now sitting in that printer that can’t be used to spend on anything else and the printers are going to go down in value. And when I come along and knock on the door and tell them that in 3 months’ time they’re going to need to find another few thousand dollars for text and they say hang on we haven’t got that. Put the printer on finance for 3 to 5 years – keep $29,000 in your bank account and use that to pay wages that generate more profit that pays for the printer and the text you may need.

There’s a wonderful book called Rich Dad Poor Dad and he was wandering around town and he desperately wanted to buy a Porsche but instead of going out and buying a Porsche, he built up his Property Portfolio so that it would generate positive cashflow profits that would generate enough to pay for the Porsche. But as it ended up, he could just rent the Porsche through the property portfolio and they saw that as a means of income.



Every business should do a thorough review of overheads each year. Reviewing the effectiveness of your marketing spend, going paperless, putting expense budgets in place and changing your technology platform are some simple ways to reduce overheads.


Is any reduction a good reduction?

Overheads and accounting speak in to be fixed but they don’t want you to do is spend every single month looking at your overhead site and

It’s important maybe once a year when you’re sitting down with me to go through your cash flow forecast. When we look at the expense budget we start looking at each expense and we use those two words – cost and benefit – again. What’s the cost, what’s the benefit? For example, advertising, what’s the cost vs the outcome, are we getting the best for our money. Is there an alternative? Whereas something like milk, the costs are all very similar so you could actually go for the cheapest with minimal impact. One of those we discuss is income, our costs to generate that income and a gross profit or margin and that’s where we make money, we’re always thinking about what to change, to make it better, that’s the gross profit margin.


What is Gross Profit Margin is too low?

Our gross profit margin is what is left from sales value after variable costs are deducted. There are a large number of strategies that you can implement to increase your margin, such as focusing on rework and wastage, reducing stock shrinkage and improving team productivity, just to name a few.

What’s the easiest way to increase margin? Well, it’s all about margin. A lot of customers will focus on overheads and that’s fine, but we do that once. How could we maybe get our labour force to make that widget a little bit quicker that would potentially save, or we increase the price that we are charging that would also change our margin. Look at the costs, can I come down a little bit? Look at the income, can it go up a little bit? Interestingly, if you made a little change to the selling price, say 1 or 2% and you made a little bit of saving in your cost of sales – say 1 or 2% – the increase in your gross margin could be well an excess of 10 to 15%!

It’s constantly measuring, once you’ve done the job, did the costs come in as expected? Have you allowed for the labour and travel costs for example? Change it accordingly for the next job and then assess once again.

Step one is figuring out your gross profit, it’s your sales less your cost of sales which is your materials just to produce whatever it is, and the difference is your gross profit. As a percentage of sales, that’s what we call your gross profit percentage calculator. So, let’s just say you calculated your gross profit margin and it was 34%, the next time you quote, make it so you are generating 35% of sales. It’s as simple as that.

If you look at a business-like McDonalds, they have put in place bulletproof type systems so that they can have anyone running the system, lowest common denominator. We need to make our systems bulletproof but we do have people running those systems and they have a view as to how can I do this better? That’s moving away from McDonald’s scenario, people are key and having the ability and availability to talk about how we can improve things is so beneficial.



If the current sales levels don’t support overheads and other cash demands on the business, then the business is not currently viable. If in high growth mode, a financing plan will be necessary. If not, we need to consider how we will grow sales. To grow sales, we need to focus on customer retention, generating leads, improving sales conversion, customer transaction frequency and pricing strategies.

Frequency is something to talk about, the easiest way to think about this is if we were to convert mortgage payments from monthly to four-weekly, now if we are paying a bank mortgage would we pay in 12 equal monthly instalments or would we be quite keen on paying every 4 weeks, making just one extra payment on a mortgage would reduce its lifetime by years.


If a business hits a point where its sales level is too low what needs to be done?

Remember the trifecta? The basics of what you need in business – you need a plan you need a budget, and you might remember the third part of our Trifecta – the accountability. That accountability partner for me when I was starting out in business used to be my was my life partner. I’d come home from work and we would talk about problems and my partner was wonderful and we would always pretty much agree, but is this the best way? I decided to employ a business coach. All of a sudden, I had someone who didn’t have a vested interest in the business but was willing to stand up and say yes or no. That helicopter view added hundreds of thousands of dollars to my bottom line.

Where your business is struggling for sales the most important thing to calculate is your break-even, what do you need at a bare minimum. If your breakeven is 100 and you’re doing that this month, you’re actually going to do 120 to make up for the rest next month.


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