11 February 2025

Cash flow is the lifeblood of any business, and improving it requires a proactive approach.  Particularly in the current economic environment.

Businesses can pull a variety of financial levers to enhance cash flow, broadly categorized into profit levers and balance sheet levers.

Additionally, building internal capability around managing cash flow and leveraging accountants for expert guidance is essential.

Proactively planning and forecasting cash flow should be a core business competency

Here’s a high level overview of how these strategies work:

Profit Levers

Profit levers focus on increasing earnings which will typically have a direct impact on cash flow.

The key profit levers are:

1. Price – Raising prices, even slightly, can significantly improve cash flow without requiring additional sales volume. However, price increases should be carefully implemented to maintain customer demand and competitiveness.
2. Volume – Increasing the number of units sold can improve cash flow by spreading fixed costs over a larger revenue base. However, volume increases should not come at the expense of profitability through excessive discounting.
3. Costs – Reducing operating costs, such as labour, rent, and raw materials, can directly improve profitability and free up cash. Reviewing supplier agreements, optimizing processes, and leveraging technology can drive efficiency.

Balance Sheet Levers

Balance sheet levers focus on optimizing working capital and asset utilization to improve cash flow. These include:

1. Inventory/Work in Progress (WIP) – Holding excess inventory ties up cash. Improving inventory turnover by aligning purchasing with demand and reducing WIP can free up cash.
2. Fixed Assets – Selling underutilized assets and/or leasing can improve liquidity. Evaluating capital expenditures to ensure they contribute to cash flow is crucial.
3. Accounts Receivable – Shortening payment terms, improving collection efforts, and incentivizing early payments can accelerate cash inflows. This includes asking for upfront payments/deposits. Implementing automated invoicing and follow-ups can reduce delays.
4. Accounts Payable – Extending payment terms with suppliers while maintaining good relationships can improve cash flow. Taking advantage of supplier discounts for early payment should be weighed against the benefits of holding cash longer.
5. Distributions to Owners – Reducing or deferring distributions to business owners preserves cash within the business, providing more flexibility to manage short-term obligations and invest in growth.
6. Access to Funding – Ensuring access to appropriate financing options, such as overdrafts, lines of credit, or working capital loans, can provide liquidity when needed. Reviewing and renegotiating loan terms can also optimize cash flow.

The Importance of Forecasting and Planning

Cash flow management is not just about reacting to financial issues as they arise—it requires a proactive system of forecasting and planning. Business owners should implement cash flow forecasting models that help predict inflows and outflows, allowing them to make informed decisions rather than relying on gut instincts. Regularly reviewing cash flow projections and making adjustments ensures financial stability and resilience.

The Compounding Effect of Small Improvements

A small improvement in each of these key areas can have a significant compounding impact.  By focusing on incremental improvements, a business can transform its financial position in a short period of time.

Building internal capability to manage cash flow effectively, leveraging accountants for expert advice, and implementing proactive forecasting and planning systems are essential to ensuring financial stability.

By actively managing these levers, businesses can improve their cash position, reduce financial stress, and create opportunities for growth.

If you would like to learn more about managing and improving cash flow, get in touch.

Sky Accountants Ballarat

Phone: 03 5332 8855

Office Address: 902 Howitt Street, Wendouree, Victoria 3355, Australia

Postal Address: PO Box 2234, Bakery Hill, Victoria 3354

Sky Accountants Gisborne & Macedon Ranges

Phone: 03 5428 1400

Office Address: 45 Hamilton Street, Gisborne, Victoria 3437, Australia

Postal Address: PO Box 270 Gisborne Victoria 3437

Sky Accountants Kilmore

Phone: 03 5782 2299

Office Address: 74B Sydney Street, Kilmore, Victoria 3764, Australia

Postal Address: PO Box 190 Kilmore Victoria 3764

Sky Accountants Bacchus Marsh

Phone: 03 4310 8000

Office Address: 66 Grant Street, Bacchus Marsh, Victoria 3340, Australia

Postal Address: 66 Grant Street, Bacchus Marsh, Victoria 3340, Australia