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In the last of our series on cash flow, we look at how to speed up your cash flow cycle.

The sale is not made until the money is in the bank. Unfortunately for many businesses, the focus is often just on the sale with little following through on collecting the cash. In this series, we'll take a look at the practical steps you can take to speed up your cash flow cycle.

While the cash flow cycle can vary slightly from business to business, the difference is usually only an addition or subtraction of one piece. In our model you start your business by investing cash, firstly in your plant and equipment, and then into stock. Next you make some sales, converting your stock into debtors. Once your debtors pay you it turns back into cash and the cycle begins again.

Think about your cash cycle like a game of monopoly. Remember when you played monopoly – every time you passed 'go' you collected $200. So the faster you could find your way around the monopoly board the more often you collected your $200.

It's pretty much the same in business. The more you can accelerate your cash cycle the faster you turn your profits into cash and the easier it is to manage your liquidity position.

Here are some tips on speeding up your cash flow cycle:

Plant & Equipment – don't have too much money tied up here. Avoid surplus plant and don't invest in plant that is significantly in excess of your capacity requirements. Sometimes it is a good idea to lease plant rather than having a lot of your capital tied up in this area. If you have surplus plant to your requirements consider selling it and turning the asset back into cash.

Stock – be careful about how much capital you have tied up in stock. Generally the more times you can turn your stock over in a year the more efficient and profitable you will be. Industry benchmarks will give you an idea about what the normal number of stock turns should be for your industry. If you are unsure about this talk to your accountant. Also avoid holding obsolete or slow moving stock. Sometimes you will be better off selling your stock at a discount rather than holding it for a long period of time. You should be aiming to have your stock levels as low as possible without impacting on the efficiency of your business.

Debtors – this is an area where lots of businesses have their cash tied up. You need to be on constant alert here and really police this area. Once you have agreed trading terms with a customer, ensure they stay within them. If you allow them to drift out not only are you incurring additional costs but you are also risking a bad debt – and that can really be costly to your business.

So, if you are looking to accelerate your cash cycle consider the following ideas:

• Buy some of your stock on a consignment basis
• Arrange with your suppliers to hold stock for you with the capability to deliver within a day or so of order
• Keep good records on your stock position so you know exactly when you need to order replacement stock
• If you have seasonal stock then be prepared to adjust your price toward the end of the season to avoid having to hold over the surplus stock
• Unless there are significant quantity discounts for buying volume stock only purchase what you know you will need within the immediate future
• Encourage customers to pay cash on delivery (COD) rather than operate on an accounts basis
• Offer settlement discounts for account customers who will pay you within seven days
• Avoid opening accounts for small customers or those who only buy from you on an occasional basis
• Allow your customers to buy from you using their credit card
• Where you are selling a service or completing a job that will take some time consider asking for a deposit to commence the work
• Always issue your invoice immediately on completion of the job
• Be prepared to stop supply if a customer does not pay you within agreed trading terms
• Always complete credit checks when you are open new customer accounts

There are lots more. Be prepared to be imaginative in the way you work with your customers and manage both your stock and debtors. Most of it is just good common sense but that is what business management is all about. And in this area, it can make a major difference to your liquidity position.

What to do when your cash flow dries up

It does happen. Even with the best of plans you can run into poor cash flow periods. For many businesses this can be a major problem, particularly if you don't have a lot of capital in your enterprise. Where there is a low capital base you are relying on a fairly constant supply of cash being generated by your business to meet your expenses and earn an income.

If the cash flow does start to dry up then you need to act on this fairly quickly. Here is a checklist to guide you through some of the things you might consider doing.

12 Steps to dealing with cash flow problems

1. Keep your information system up-to-date so you can pick up on the early warning signs. If things are going to get tough advance notice is important.

2. Have budgets and cash flows in place so you can compare what is actually happening with what you anticipated would happen.

3. Be honest with yourself and don't make excuses. Identify where any problem areas are.

4. Act on the problem quickly – don't wait around hoping that it will get better.

5. Deal with the problem. If your debtors are slow in paying get on the phone and follow them up, if you have too much stock stop buying and run your stock levels down.

6. If the problem is due to a downturn in business then start to have a look at your costs and see where you can make some savings.

7. Review your expenditure and delay any unnecessary spending.

8. If there has been a business downturn have a look at your marketing and see if there are any ways that you can reverse the trend.

9. Revise your cash flow forecasts and get a picture of what things are going to look like over the coming months. Then monitor it closely.

10. Make use of your accountant. Get their advice and assistance in assessing your position and managing it. They will provide an independent sounding board and will have probably dealt with the same situation many times before. This experience is invaluable.

11. Keep in touch with your bank. Be open and honest with them. Tell them if you have a problem and what you are doing about it. If you need additional overdraft facilities then calculate how much you need and go and talk to your bank manager about your position.

12. If you are going to be slow in paying some of your suppliers, again be up front and talk to them about your position. They are more likely to support you if they know what is happening and that you are managing the situation.

• Series 1: Where does all of my cash go?
  
  
• Series 2: How to avoid running out of cash
  
  
• Series 3: Show me the money!