Part 3. Turn assets into cash with greater speed and frequency. Here is how.
By James Chittenden
If you are buying something for $1 and selling it for $2, your prosperity depends on how fast and how often you can turn over inventory. This is the working capital cycle; a measure of how long your dollars are out the door while you wait for them to return. There are ways to speed up your cash flow; turning assets into cash faster and more often.
In the case of the plumbing company in this example, their most recent year’s profit margin was 37 percent, so how long does it take for that business to make a purchase of inventory, sell it, and have it come back, plus 37 percent?
There are many ways to improve this, but improve your margins first. Then improve the speed of your money.
Eight ways to improve your working capital cycle
Speed up your cash flow by increasing both sales and collections through incentives. These can include:
1. Incentivize receivables. Offer discounts for paying fast.
2. Improve inventory management. Don’t keep too much around.
3. Manage expenses better to improve cash flow.
4. Automate processes better for better cash flow.
5. Late payment penalties charged to slow payers.
6. Work with vendors who offer deals and discounts.
7. Segment customers according to credit risk (use Bizminer, for example).
8. Negotiate better terms with suppliers or distributors.
Welcome to One Click Advisor! We would be remiss if we didn’t give you a brief tour of the site and what it can do for you. The free Business Builder is a consulting session, solving your business plan questions in minutes. Your challenges and opportunities can be sorted into one of three areas.
Marketing, because it brings in the customers. Start or continue that plan here.
Operations, because it keeps your customers. Start or continue that plan here.
Finance, because it is the scoreboard. Change the “score” and explore financing here.
Improve your profits by speeding up your cash flow.