Business mentor: Tips to get the cash flowing from your sales

My business is going well. We established ourselves less than two years ago and sales have gone from strength to strength. However we are cash-strapped. Cashflow is a real problem even though our sales have exceeded budget. How can I change this?

Tracey McKeown, director of Urban Accounting, replies:

There are several reasons why increased sales might not equate to increased cashflow. The areas to review are:

* Cost of sales (margins).

* Expenses or overheads.

* Fixed assets.

* Credit.

Cost of sales are the costs which are directly attributable to providing the product or service the business is selling - in a cafe or restaurant that would be the ingredients and beverages.

Keep an eye on wastage. High wastage results in your cost of sales being higher than they need to be. If wastage is a fact of life, you will need to factor it into your pricing.

Keep an eye on inventory levels. Inventory equals money invested. If you are holding high levels of stock, this is money spent that you have not yet had a return on.

Consider buying smaller volumes of slow-moving items or negotiating a sale or return policy with your suppliers.

Watch your sales margin. The formula is (sales less cost of sales) divided by sales equals margin percentage. If your margin is reducing or varies markedly over time it could mean that:

* Pricing of new products should be reviewed.

* Cost of sales may be increasing.

* You have a number of products and the balance between products with different margins has shifted. Learning how to measure your margin will help you understand your business better and provides you with a tool to measure how effective your pricing is.

* Expenses or overheads are the day-to-day costs of running your business. Things to consider are:

1. Costs. Understand the difference between fixed and variable costs. Some costs are incurred no matter what level of sales you have and do not vary with the level of sales. These are fixed costs and examples are rent and the cost of administration staff. To calculate the level of sales required to cover these expenses, total the fixed expenses and divide by your sales margin (see above). This will give you the amount in dollars you will need to sell in order to cover off your fixed expenses.

2. Getting the best price. When you started out in business you may not have been in a position to get a volume or business rate for some of your expenses such as stationery or printing. Now that your volumes have increased, it may be worth reviewing your pricing options.

3. Fixed assets. These are items you have purchased for the long term such as computers or manufacturing equipment, and are often significant enough to have a major impact on your cashflow. Consider leasing and financing options if cashflow is an issue.

4. Credit. By its very nature, credit affects cashflow. If there is a significant difference between the credit terms you offer clients, and those you are receiving from your suppliers, you have a potential cashflow problem. If your clients who you offer credit to, and they pay you on the 20th of the month, and your suppliers require payment within seven days you are going to be paying out money for sales that have not yet been collected.

Here are some ways to tackle this problem:

1. Talk to your clients about changing their payment terms to the 20th of the month. You may need to provide them with an incentive such as a discount.

2. Introduce credit limits to minimise your exposure so that if clients place a large order, this will not destroy your cashflow for the month.

3. Ask your clients if they would consider paying you by credit card at time of sale, thereby preserving the terms on which the clients are paying but allowing you to get your money faster.

4. Talk to your suppliers about moving to monthly payment terms. By developing preferred supplier relationships with your suppliers, you will be in a better position to negotiate with them.

5. Ask your suppliers if they will accept credit card payment: this will increase your effective payment terms.

6. Invoice your clients on time.

7. One of the most important tools you have for overcoming a cash imbalance caused by differing credit terms is a strong relationship with your suppliers. Your success and their success are dependent on each other.

8. Last, consider putting a cashflow forecasting process in place. This will allow you to predict and be prepared for cash shortages.

* Tracey McKeown can be contacted at Urban Accounting or by phoning (09) 376-2701.