In business, we focus a lot on profit, but it’s easy to forget that operating with a positive cash flow can be just as important. Companies can be profitable and yet not have adequate cash flow – in a worst-case scenario, insufficient cash flow in a business over the long term leads it to bankruptcy.
In manufacturing, let’s look at an example of an automotive company making car parts and selling them at a profit. There’s a long supply chain and the wholesale customers you work with can take months to pay in invoices. However, the suppliers you work with to create parts often want to be paid upon receipt or in a couple of weeks.
Even if you have a great product that is increasing in sales, you’re in trouble if you’re caught between suppliers that want you to pay and buyers that are slow to pay. Although you’re a profitable company, this situation means you can’t pay suppliers on time or meet payroll and operational expenses. You’ve got yourself into a cash flow crisis.
On the other hand, your sales could grow with money coming in but it doesn’t necessarily mean you’re making a profit if you’re spending too much elsewhere. If you borrow money to solve cash flow problems (and Carillion ended up owing billions), the rising debt costs can raise costs above what you’re making. Like Carillion, eventually cash flow dries up and the business fails.
Big businesses and their financial departments constantly look at ways to improve cash flow. Here are ten ways to fix cash flow problems for your business – see which could apply to your company in the future.
Increase your prices
Like small businesses, big businesses need to be careful about raising prices – it’s a balance between increasing prices and doing it in a way which doesn’t alienate or cost customers.
In 2017, it was well publicized that streaming giant Netflix increased prices on products, which caused a backlash in the media and on social channels. However, Netflix is still going from strength to strength, and most of its customers believe the value of what they get from the product is worth what they pay.
Timing is crucial when it comes to increasing prices. For instance, Netflix timed price increases with a selection of new programs that are only available through its services – critically acclaimed series such as The Crown and Stranger Things, as well as an increased focus on creating movie-grade productions in combination with the likes of Brad Pitt, Will Smith and Adam Sandler.
The lesson to take away? Avoid shocking your customer base and look at ways that you can show more value from your product.
Reduce the cost of your payroll
Payroll is typically the biggest expense for a business. The tough reality is that when earnings fall below a certain point, cutting personnel will be the main way that outgoing cash flow can be stemmed. If your business does make this decision, it needs to work out what to cut, when to cut and how to minimize the damage.
Making staff redundant can be extremely traumatic for any company but, although difficult, emotion needs to be taken out of the equation – the decisions about who goes and who doesn’t go should be based on capability, rather than who is senior and who particularly needs the job most.
However, there are other more palatable ways you can cut payroll costs, such as shortening the working week, cutting salaries, turning full-time workers into part-timers, enacting leave of absences and cutting bonuses.
Announcing cuts can be one of the biggest challenges for business leaders – you need to face up to your employees, be honest, real and appeal to their sense of reason. Redundancies are a way of life in business – but you can play a part in helping employees realize it’s not the end of the world.
Get rid of excess inventory
If you are a manufacturer and you have excess inventory in the form of goods produced that you haven’t been able to sell, then you effectively have money sitting around that can be a huge drain on profits and cash flow if you can’t sell it.
The best-case scenario is to avoid this situation if you can help it – with the right technology you can properly forecast sales to avoid purchasing too much.
Unfortunately, it’s unlikely you’ll be able to recover all your costs, but you can mitigate the damage from additional storage and carrying costs, as a decline in value as inventory ages.
Look at ways to reduce your inventory – for instance; your supplier might be able to give you a refund or money back at a reasonable discount. If your inventory comes in the form of raw materials, you can use it in other lines or other plants. You might even want to work with competitors by sharing inventory and supplies.
Negotiate with suppliers
Finding your business in a weak position with suppliers can negatively affect cash flow, which means you should look at ways to offer value and get concessions on price. One of the ways you can do this is by offering a way to reach new markets.
If you’re part of a food and drink company facing a supplier price increase, you could offer opportunities to enter and be successful in new developing markets that a supplier might not be able to get traction in.
Another way you could get price concessions from a supplier is by reducing price risk. For example, if you’re a food and beverage manufacturer facing a price rise from a supplier, you can persuade them to keep prices lower by entering a long-term contract, which from their side is a safer bet than dealing with short-term economic fluctuations.
If you can’t find ways of offering more value to a supplier, think about making financial changes in the way you buy – by consolidating purchase orders, for example.
Merge the business
Mergers and acquisition are a big part of corporate finance, with news headlines routinely talking about bringing companies together to form bigger ones. Mergers concern the combination of two companies, while an acquisition is where one business buys another.
In the enterprise resources planning (ERP) space, these deals can be worth billions of pounds. There are some good reasons why merging companies have a positive effect on cash flow – such as increasing revenue, reducing overheads and therefore the need for redundancies, and the ability to attract more capital.
Other ways mergers can increase cash flow are by creating better experiences for customers and more innovative products that a business is willing to spend more money on.
You can also create a more skilled management team, especially if the two companies are a good cultural fit and complement each other. It also offers a way to reach new markets and geographies, which can increase market share and bring in more money.
Sell assets you don’t need
A natural effect of mergers and acquisitions is that corporations may end up having non-core assets that lack management time and investment, which end up as unwanted assets and become a drain on finances.
Sometimes it’s worth selling these non-core assets to other businesses that can add the technology and distribution capabilities to take better advantage of what it can produce.
This can be a good way to stave off cash shortages and invest more money in your core business – and in some scenarios, the only way for a business to continue operating.
One thing to remember is that although selling off assets will increase your cash flow, it doesn’t necessarily mean it will leave your company in better shape. For example, if your business sells a division for millions, it won’t make money for you next year and can’t be sold off again.
Take General Electric. Poor results in 2017 meant it put plans in place to sell $20bn of non-core assets to improve cash flow, and it remains to be seen whether this activity which will keep it attractive to investors.
Delay your capital spending
There are good reasons for businesses to have a high capital expenditure, particularly in industries that require significant investment in areas such as innovation for future growth.
However, capital budgets can consume a large amount of cash flow and sometimes difficult decisions need to be made around cutting the money spent on acquiring or maintaining assets. It’s here where financial leaders need to have a good knowledge of the capital requirements of future projects, the balance sheet, and cash flow constraints.
Predictive analytics can be vital as they can produce information that allows the business to understand where they should and should not cut capital expenditure to aid cash flow. You might need to do a thorough cost-benefit analysis to justify the expenditure, comparing the costs involved to potential benefits.
In wholesale and distribution, for example, although it may help cash flow to cut the spending needed to improve the effectiveness of a warehouse, it may cost a company long term if it doesn’t increase storage and access to inventory.
Shut down the loss-making parts of your business
Sometimes large businesses may have to shut down its loss-making divisions to focus on its bigger markets. For an automotive manufacturer, it may be the case that it’s losing money in an operation in Europe due to increasing competition and bigger overheads but is profitable in a developing country with better growth prospects.
It, therefore, might make sense to shut down its loss-making part of the business and instead focus on its healthier operation.
In a worst-case scenario, a business may consider shutting down completely so it stops the risk of losing money during ongoing production. This may buy time to evaluate the future of the business and what you should do next to stem losses.
However, there’s a whole lot of issues around making such a move – you’ll need to think about the negative media attention you might get, the loss of confidence with your customers and clients, as well as what it will do in affecting employees and any perishable inventory which you haven’t sold.
Raise new debt or refinance
Refinancing is an expected part of corporate businesses, which might involve restructuring a debt with a lower business rate or issuing new equity to pay down debt.
If your businesses has cash flow problems, refinancing could be a way for to meet debt obligations before getting in further trouble and resorting to bankruptcy. More positively, you can use refinancing to take advantage of better credit ratings or favorable market conditions.
You may also want to raise new debt to support a growth or acquisition strategy, which you’ve predicted in the long term will increase cash flow through increased sales.
Again, using the Netflix example, the company offered $1.6bn in new debt in 2017 to fund an extended content budget. The idea around this is to attract new subscribers internationally with original content – and Netflix more than hitting targets that were set.
The Netflix example is unique in that it currently operates with negative cash flow, which it expects to continue for a few years. This is because it pays for content before viewers watch it.
However, over the long term, the thinking is that it will profit from recurring revenue and a loyal customer base. While “negative” cash flow doesn’t sound good, it isn’t always bad – sometimes you’ve got to spend money to make money.
Raise equity through the stock market
If your enterprise reaches a certain size, then it may reach a stage in its development where you’ll want to join a public market such the London Stock Exchange or the Dow Jones.
What this means is that your business will essentially sell ownership in the form of shares, which it can raise funds to increase cash flow and which you spend on growing further. This type of activity can be a huge media event, such as the giant billion-pound initial public offerings (IPOs) for companies such as Facebook and Google.
The benefit of equity capital over debt is that your business won’t have to repay the shareholder investment with accumulated interest.
However, you’ll be expected to provide a return on investment for shareholders from positive performance in the stock market in the form of dividends and stock valuations.
The disadvantage from a business point of view is that shareholders now hold pieces of your company, which means you are beholden to ensure the business remains profitable.
Recommended Next Read
6 signs your business is ready for a cloud-based accounting solution
Manufacturing Report: Riding the Wave of Uncertainty
How process manufacturers are planning for a brighter future in 2019.