Unlock the Hidden Cash

If changing economic conditions are going to put a squeeze on your business, the first place you will see the signs is in the cashflow statement.

Of course, positive cash flow alone is not enough. The business must be returning a profit and the long term trend for both must be positive. You will not only need to make sure your business is profitable, you also need to make sure you have enough cash available at the right time to pay all the bills. In particular, you must be able to pay your suppliers, staff and meet your tax liabilities.

If you do a quick estimate of how much money you have tied up in debtors, suppliers paid too quickly, excess or slow moving stock and work not invoiced you might find it’s worth investing some time to address these four areas. It might put some funds back into your account and reduce your interest bill if you run an overdraft.

There are many places your cash can be hidden other than in your bank account:

  • Debtors – unpaid customer accounts. Do your statements go out on time? Are you monitoring the customers who don’t pay within your terms? Consider printing the actual due date on your invoices rather than the standard 30 or 60 days. Follow up delinquents. Remember, the ‘squeaky wheel always get attention’. You are not in the business of ‘bank rolling’ other businesses or customers.
  • Suppliers might be paid too quickly. As you know, the supplier who rings and annoys you for payment often gets paid first when they shouldn’t. Worse still, the part time bookkeeper that pays bills the moment they arrive. This can play havoc with your cash flow and you need to use up all your available terms and even negotiate better terms if you can.
  • Investigate alternative suppliers and explore their prices and terms. Keep your suppliers on their toes and make sure your suppliers earn your business
  • Work in Progress can be a real hiding place for cash. If you have multiple jobs on the go at once it can be difficult to manage and get them to the point of invoicing. There can be all kinds of delays from slow delivery of parts, labour issues, getting access to job sites etc. If you are tracking stock manually or in your head without any process then it could create big cash flow headaches.
  • Stock is really cash piled up in your store room. Do you have any methodology behind your stock purchasing? Many businesses buy when the sales rep calls or if they are offered a discount. You should only buy stock when it suits you, not your supplier.

The objective of any retailer or wholesaler is to have your stock on the shelf ready for sale for the shortest possible time. Put simply, stock is money because it absorbs precious working capital that could be used for the other things like advertising, wages and expansion costs. If you have borrowings in your business, excess stock could be costing you interest.

Vital to this objective is to know the sales cycle of your products, i.e. how long does it take from when the goods arrive into stock until when they are sold. You may have historical data upon which to calculate the sales cycle. If not, you need a way to calculate how long goods are sitting in stock so that you can minimize the length of time and maximize your available working capital. This is called ‘Stock Days’ and is an average of all stock lines. One way to calculate ‘Stock Days’ by using your financial reports is as follows:

Stock on Hand ÷ Cost of Goods x Time Period = Stock Days

Stock on Hand means the dollar value of stock on hand at a given date, e.g. June 30
Cost of Goods means the direct costs of getting the goods ready for sale, including purchase of the goods, freight inwards, store costs (but not fixed overheads like administration wages or advertising)
Time Period is the reporting period upon which you are basing the above two numbers.
A business with $150,000 in stock at June 30 and Cost of Goods for the year of $400,000 has ‘Stock Days’ of 137 i.e. $150,000 ÷ $400,000 x 365 = 137.

This means that, on average, stock in this business takes 137 days from when it arrives until it is sold. Once you know this number you are then in a position to manage the situation and work on shortening the cycle.

Again, a good stock control and record keeping system is required that tells you the following:

  • What is selling
  • What isn’t selling
  • What the slow moving items are
  • What has become obsolete
  • What the trends/seasonal patterns are
  • What your margins are on items; and
  • What it is costing to store stock.

You can determine your minimum and maximum stock level requirement for various items lines. This makes it much easier for staff to know what, how much, and when to order.

Obsolete stock can be a real ‘hiding place’ for cash. It’s tough to sell items at a loss, but if they are going to sit there forever, you may as well turn them into working capital to spend on better selling items. If you have good records you are also in a position to know how much you are purchasing from suppliers. This puts you in a better bargaining position when it’s time to renegotiate prices and terms.