Last week we spoke about revenue and profit drivers. Today we continue that discussion and discuss cash flow drivers.

But first, an ad for myself. :)

A MESSAGE FROM SMB Financial Fundamentals Cohort​

MASTER YOUR NUMBERS, LIVE!

Hey, Kurtis here. This is the part where I advertise for myself.

Today, I am “launching” my cohort waitlist, where we learn out to take your numbers and use them to make better business decisions.

But first, a bit of background.

Back in 2021 and 2022, I ran a cohort 3 times breaking down how to read financial statements. In that cohort, I helped business owners and leaders learn how to translate their financials. We got some awesome feedback.

But, I stopped doing it.

I just didn’t feel I had the capacity to continue, but I knew someday I’d revisit it.

So today, here we are.

Today I’m “launching” the waitlist for my new cohort, SMB Financial Fundamentals.

But instead of running back the same thing, I knew I had to take it to the next level.

This time we’re utilizing both pre-recorded sessions and live sessions to deliver the most value possible.

Over four weeks we’ll help you:

• Learn how to decode your financial statements
• Identify key results drivers for your situation
• Select, track, and act on your key metrics
• Use your numbers to make better decisions and tell your story

We won’t just stick to theory… we’re going to dig into YOUR numbers.

Through the live breakout sessions to one-on-one sessions with me, you’ll walk away from this cohort with a complete system on how to analyze, digest, and use your numbers to improve your business outcomes.

In version 3 of Financial Statements Decoded, I charged $1,500.

But since this now “version 1” again, I’ve reduced the price as you go through this circculum for the first time with me. Next round the price will be increased, so this is the lowest you’ll ever see it ($795).

And, if you join the waitlist today, you’ll get a code for additional $100 off. But only those on the waitlist get it!

Monday I’m opening enrollment and the opportunity to get the code goes away, so make sure you join today.

Hope to see you inside!

Want to advertise to 35,000 small business owners and leaders? Go here.

MASTERING CASH FLOW

Manage your cash by your bank account? Please stop…

When starting a business from scratch, most business owners effectively manage by bank account. You watch the bank and what goes in and out and get a decent feel for the business.

But as a business grows, the inflows and outflows become more complicated.

The problem is a lot of business owners convince themselves this management by bank balance is still working. I don’t blame them, because it’s part of the human condition. But then, one of three common scenarios happens:

1. They have a payroll coming due (or owe money to suppliers) and are franticly calling (or suffering in silence) customers to see if their money is coming.
2. A customer either fails to pay or goes out of business with a large OLD balance outstanding. In discussions, the business owner either never reached out or didn’t reach out enough.
3. The tax man comes calling and the business owner realizes they’ve already spent the money.

There are many other ways cash management by bank balance can go wrong and all of them end in stress, lack of confidence/certainty about the state of your business, and bad business decisions.

Today we’re going to talk about five drivers to manage the cash flow of your business, which will help you rethink your relationship to the cash in your business.

Inventory Management

Inventory is one of the biggest drags on cash, as growing businesses constantly need to reinvest cash to increase inventory. Businesses that are growing quickly can run out of cash, even if extremely profitable.

This was such a problem for Amazon sellers that Amazon even stepped in to offer debt to sellers so they could continue to order products.

Good inventory management can completely transform a business.

With inventory, there are two levers to pull: inventory turns and cost.

Managing for turns

Inventory turnover ratio measures how quickly inventory is moving through the system. When optimized, inventory is turned over quickly, meaning less cash is tied up in the system and available for recirculation to buy more inventory.

1. Just-in-Time (JIT) Inventory: Reduce holding costs by ordering inventory as close as possible to when it’s actually needed.
2. Dropshipping: Eliminate inventory holding costs by having the manufacturer or wholesaler ship directly to customers.
3. Consignment Inventory: Reduce inventory costs by paying for inventory only when it sells.
4. Demand Forecasting: Improve demand forecasting to reduce excess inventory and shorten the CCC.

Managing for cost

Having the right supplier relationships is key to managing cost. Other factors include reducing in-transit cost and holding cost (which goes back to inventory turns).

Here are a few examples of ways to manage inventory cost:

1. ABC Analysis: Prioritize stocking the items that provide the most value (A-items) while reducing focus on lower-value items (C-items). This is done by labeling the priority of different items A, B, or C and then using that label to determine how you manage that inventory. A inventory could mean you don’t want to run out of stock, so you keep more on hand, while B could mean following just-in-time principles, and C means you dropship. Each of these decisions has the potential to impact the customer experience but can be worth it if it allows you to scale higher margin products (which would fall into “A”) more quickly.
2. Bulk Purchases with Caution: While bulk purchasing can reduce per-unit cost, it increases holding costs. I don’t typically recommend bulk purchasing unless you have a ton of excess cash on hand (and there is no better use of that cash) and there is no spoilage potential for the inventory. This is a balancing act, as it’s hard to liquidate slow-moving inventory quickly without losing margin points.
3. Supplier Negotiations: Supplier relationships are key to managing the costs and frankly something a whole post could be written on. In an ideal world, you’d have multiple suppliers you could pit against each other and get the lowest price on every order. The reality is much different. A growing business is highly attractive to suppliers, which increases your power. But without the growth and being limited in size in relation to their capacity means your power dwindles. Being loyal to a suppliers assures quality, but could hurt your bottom line. Often the supplier you start with isn’t who you scale with, and it’s important to regularly evaluate your options.

If interested in going deeper on improving cost of goods, I wrote about 4 ways to improve gross margin here.

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For service businesses, your process will look a little different. You’re focusing on capacity planning and employee salaries. I’ll probably write about these at some point, but for now, consider your hiring/planning practices and how you systemize employee wages.

Cash Conversion Cycle

CCC measures the time between paying for inventory to receiving money from your customer. The whole goal is to reduce the time between paying to receiving money to the bare minimum. Some businesses have even turned this negative (meaning they get paid before having to pay) and I can say I’m absolutely jealous.

Cash Conversion Cycle is made of 3 elements: days inventory, days payables outstanding, and days receivables outstanding.

So, to improve your cash position you need to look at these 3 elements. I’ve written about this extensively in the past, so I’m going to link those here:

• ​Gamifying cash management​
• ​Where did all the cash go?​
• ​13 ways to collect receivables more quickly here​

Each of the three elements are independent parts of the system, so there is a lot to work through and a lot of ways to “skin the cat.”

For example, sure you can reduce your payment terms to your customers, but how will that impact your relationship? Instead, bill more frequently, require more money upfront for new customers, and work on deepening customer relationships (thus greasing the wheels of commerce) to improve receivables balances.

Or, on the inventory side, instead of negotiating hard with your supplier, improve your internal processes and seek out other supplier relationships.

Capital Expenditures

Equipment breaking down and creating downtime in your business is the worst case scenario. Unfortunately, too many businesses operate in this cycle: something breaks down and they fix it.

Instead, we need to take a proactive approach to managing capital expenditures. It helps the business run better, but also means you can plan your cash flow.

Planning the cash flow not only gives you more confidence in your financial position, but it helps you save money. When the equipment is down, you could end up with a higher price on the equipment and/or higher interest on the debt.

But with a plan, you can buy during promotions and get the lowest possible interest rate (or none at all?).

This falls under “simple and obvious” but something that is too often ignored.

Some things to consider to manage your capital expenditures:

1. Create an equipment replacement schedule to allow you to plan out expenditures, thus spreading out the cost.
2. Establish a preventive maintenance plan to extend the life of the equipment and avoid costly breakdowns.
3. Analyze leasing over buying to spread out the cost and offload maintenance risk.
4. Research government grants and subsidies to explore the opportunity for assistance in purchasing new equipment, lowering your cost in real dollars or interest expense.
5. Analyze equipment maintenance costs and buy used equipment instead of new, optimizing the time of purchase.
6. Dispose of unused or underutilized equipment to free up capital (sooo many businesses just have money sitting around).

If you want to go deeper into planning for capex, I wrote about growth capex and maintenance capex in 2023. I also wrote about how to budget for capital expenditures here.

Borrowing Capacity & Debt Service

Debt management is a specialty in itself and something we should probably discuss in the future.

Let me guess… you chose your bank because your buddy either was a banker or recommended one? All banks aren’t the same and the wrong bank can mean bad covenants, higher interest, and a refusal to extend more debt when it’s needed.

I don’t blame the bank, as our businesses have specialties too.

It’s important to pick the right relationships up front because switching is hard.

When it comes to debt, you’re looking at two things: borrowing capacity and cost of the debt.

Borrowing capacity allows you to grow quickly and have a margin of error when things go poorly.

Reducing your debt service cost (principal and interest payments) when possible gives you more flexibility in the future.

Here are a few ways to better manage these costs:

1. Build strong banking relationships from the start, as it’ll improve your ability to get new debt requests approved.
2. Pay down existing debt when able. This increases availability and shows your bank you’re operating in a way that builds trust.
3. Look for government loan and grant opportunities, as they can often offer better terms.
4. Refinance High-Cost Debt when interest rates decrease. Stick with fixed rates where possible, only taking risks on variable rates when you have the ability to pay them down.
5. Review your debt agreements, making sure you understand them and know all the covenants and restrictions.

Wrapping Up

Managing cash flow is one of the most important skills to learn has you grow your business.

Today I’ve just hit on the surface, but I’ll go much deeper in my cohort. I encourage you to join the waitlist and consider joining!