The review of your business’s financial data can go a lot in directing you on the next path to take in making your business grow. Cash flow is a very crucial part of any business, therefore, you need to use it for the business’s growth.
You need to check what is bringing in money so that you can intensify efforts that will even bring more in. the following drivers will guide you on what channel you need to focus on to get this.
Account Receivable Days
This is the number of days it can take a customer to pay for your service, it depends on the nature of your market and agreement. You need to be able to formulate an average account receivable period so that you will be able to make informed decisions with your cash flow.
Accounts Payables Days
This is the number of days you are allowed to receive goods from suppliers before you pay. For example, an office supply company may provide coffee on a monthly basis for a company. The office supply company (the vendor) may set payment terms for 30 days. This means that the company has 30 days to pay the invoice in full. You need to work on this too to avoid any disappointment with your cash flow.
Work In Progress Days
This is the number of days it takes to deliver your product from inventory stage to the final delivery when you can submit an invoice. You need to be sure of this so that you can actually be able to plan when you will get you to pay a cheque or give a supplier or worker a cheque too.
One way to improve cash flow here is to streamline the job management process. Optimizing workflow on a job reduces the number of work in progress days, which positively impacts cash flow. Additionally, when a job is completed early, it improves customer satisfaction – a mighty incentive for the client to pay for the job faster.
Price Change Percentage
This is any fluctuation in price, prices increase and decrease periodically. As a business owner, you need to track these fluctuations and add it to every possible cost that you need to add it to.
There are also things that are nearly impossible to predict, such as a spike in fuel prices or an increase in food prices. Your company needs to be able to accommodate for these variations, which is why it is so important to monitor your margins. If you see your profit margins shrinking, it might be time to reevaluate your rates
Revenue Growth Percentage
You need to be able to calculate how the increase in your production and sales is helping and adding to the growth of the firm. Increasing sales can sometimes exacerbate your cash flow problems because most times customers do not pay immediately.
You need to have enough cash in the bank to cover the costs of your labor and operating expenses. If you’re already running low on resources, boosting sales can actually decrease your cash flow drastically.
Cost Of Goods Sold Percentage
This is the cost of production of goods and services till it gets to the final consumer. Reducing the costs of goods sold directly impacts your bottom line.
Steps to reduce your COGS can include buying materials in bulk, negotiating with suppliers, and reducing waste. Of all of the seven cash flow drivers, cost of goods sold has the most impact.
Overhead is every other type of cost that you need to incure, from rent to internet service, light, power e.t.c. An unexpected warm summer or cold winter can drive up the electric bill, therefore, plan on this too to keep your cash flow steady.
In order to keep your overhead percentage in check (which improves cash flow) you need to track your budget.
Monitoring your actuals versus budget for overhead keeps your overheads percentage stable and allows you to better budget for operating costs in the future.