Without the right level of liquidity ( cash is not equal to profit), a company might be not able to survive.
Hence, the company’s first task is to improve its cash flows. The company needs to review all its cash flow projections whether cash inflow or outflows and must be able to PLAN, TIME or MATCH it accordingly. This might “help” to alleviate some challenges posed by the immediate cash flow deficit though this is a short term gap measure.
The following are some of the ways to improve the company’s tight cash flow situations:
RELOOK AT YOUR CAPITAL EXPENDITURE BUDGET AND FOCUS ON BETTER UTILIZATION OF NON CURRENT ASSETS
- Manage your cash outflow of capital expenditure by ensuring that the fixed assets are absolutely necessary before incurring it. For a business, there is a need to weigh profitability and cash flow in investment appraisal .Hence, payback basis might be one answer to improve cash flow.
- Defer projects that cannot achieve acceptable cash paybacks.
- Defer unnecessary and unproductive capital expenditures
- Focus on short or quick payback though profitability level might not be the desirous level. Perhaps, balancing this cash flow with other projects that give higher yields might be more appropriate
- A business cash flow can be improved if top management exercise less risk appetite and are more conservative/ prudent so that cash flow can be conserved within the business instead of aggressive investments into the projects.
- Hive off or dispose off unwanted, surplus fixed assets and investments
- Plan strategically by looking at innovative means of unlocking cash out of your fixed assets like Sale and Leaseback, creating Real Estate Investment Trust (REIT)
- Make your fixed assets investment turn faster. For example, convert it into warehousing facilities to lease out to others or sub-lease your office which has surplus space or share common facilities and leave balance for rental, etc
FOCUS ON IMPROVING OVERALL COMPANY’S PROFITABILITY
With more innovative pricing, higher gross profit margin can be achieved and assuming constant cost hence when the money is collected , there is then a larger quantum of “liquid profits”
- Attempt to increase Sales Volume
Again, the impact means a higher sales and assuming costs maintained. So,if cash are collected back, then there is a larger quantum of “liquid profits”
- Reduce or manage effectively the business expenses.
With this, cash outflow in terms of payment of goods or services can be smaller hence overall net cash flow can be saved/improved
- Eliminate or simplify unwanted business operations to reduce costs of operations
- Seek to eliminate goods or services which are not really value-adding to the company’s business hence reducing costs
FOCUS ON SOURCING ALTERNATIVE FINANCE
- Strategically, when the business is expanding drastically and to prevent overtrading or under-capitalized ,it is critical that the shareholder need to put additional money in the form of paid up capital into the business instead of relying on external parties
- Obtain other sources of financing like bank overdrafts, term loans, debentures, and longer credit terms from suppliers.
- Use factoring facility to convert your billings to customers into cash.
- Instead of using one lump sum to paid for fixed assets, go for leasing or hire purchase terms to alleviate cash flows problems
FOCUS ON CONVERTING SHORT TERM BORROWINGS TO LONGER TERM BORROWINGS
- Try to convince your bankers to convert some of short term borrowings into longer term loans. Also see whether repayment can be staggered or pay at tail-end of project instead of up-front loading.
FOCUS ON MINIMIZING OR DELAYING YOUR CASH OUTFLOWS FOR THE TIME BEING
- Minimize your cash dividend payout by issuing script dividend or bonus issue.
- Seek to extend/re-negotiate debt repayment periods & banking facilities.
- Apply for tax installments to the Authority for the payment of any income tax payable
- Seek deposits or multiple stage payment.
FOCUS ON IMPROVING YOUR DAILY WORKING CAPITAL CYCLE
- Improve your Order to Cash cycle by simplification, standardization and automation leading to error free process flows to enable money to be collected without much disputes
- Review any cash term with our creditors, if need be to extend the credit terms by ensuring long term relationship and promise to pay timely
- Make prompt payments only when we need to enjoy discount from the creditors.
- Use barter to acquire goods and services.
- Establish better planning and forecasting to reduce the lead time of inventories from suppliers.
- Use the 80/20 rule to manage current assets.
- Encourage suppliers to keep stock for us ( just in time concept) or on a consignment basis
- Convert raw materials into work-in progress to anticipate for sale to customers. This needs great efforts for both production,sales department and the customers.
- Sell off or return obsolete/excess inventory(even with a loss just to generate the cash flow)
- Improve systems for billing and collection.
- Review credit terms with our customers wherever possible
- Be more selective (if possible) when granting credit.
- Offer a well structure cash discounts scheme to enable faster collections from customers (add deterrent charges like late payment charges /fees if debtors have not settled on time).
See Related article on understanding daily working capital cycle so as to be better equip to handle cash flow situations.