“There are four principal ways to improve your cash position. Introducing new funds, unlocking tied up cash, reducing cash leakages and generating increasing cash flows.”
In every business, managing the cash reserves of that business is critical to its performance. Too many businesses tie up valuable resources in juggling cash flows and revising less efficient operational processes to suit the limited cash position of that business. The cost to those businesses is huge. And in a competitive environment, the additional costs incurred by an under-funded business will eventually cause that business to fail.
Of the four methods for growing the cash reserves of the business, gross profit is easily the most important. I will explain why in the following review.
Introducing new funds
Cash can be introduced into the business either through debt funding or equity funding arrangements. These options are not always available and, if available, often come at great cost. Apart from the cost of debt funding (fees and interest), this form of funding will increase the risk profile of the business. Introducing new equity into the business will either reduce personal finances or dilute the current ownership levels.
Unlocking tied up cash
Reducing cash tied up in working capital accounts or selling off assets (e.g. sale and lease back) is a good way to improve the cash position in a business. But it is a limited source of cash as it is a one-off activity (although continued good management is important).
Reducing cash leakages
The overhead expenditure in a business should always be reviewed. Often things can be done more efficiently either through productivity improvements or greater capacity utilisation. Also, improvements can be achieved through the growing trend to the outsourcing of some activities (e.g. virtual CFOs). Any costs relating to overhead expenditure that are not contributing to the performance of the business are considered to be cash leakages from the business. There is often savings to be found here but businesses need to be careful that they do not harm their capacity to deliver the value-add that is their core business.
Generating increasing cash flows
The real cash powerhouse of a business is its gross profit (sales less the cost of the goods or services sold). This is the measure of the wealth creation activities of the business. The retention of cash generated from sales will depend on the gross profit margins and volumes of those goods or services sold. There are many ways these cash flows can be grown. Costs can be reduced, higher margin products sold, unprofitable customers terminated, product mixes altered, new products or sales channels introduced and numerous other alternatives. Growing sales volumes is obviously very powerful but can be very difficult to achieve. Indirectly, improving the cash reserves of the business can be a key driver for increased sales volumes as resources get refocused on sales and marketing activities and customer service levels improve.
To introduce the right strategies to achieve an improved cash position, each business needs to have detailed analysis and targeted reporting systems. Skilled and experienced financial professionals are an important resource for providing this capability.
For those many businesses who do not have the resources or skills to achieve this type of analysis they should speak to an experienced gross profit consultant who can provide this level of support. The members of the Association of Virtual CFOs is a great place to start if you wish to speak to someone about gaining control of your gross profit margins.
