How to Increase Free Business Cash Flow with FUTRLI
Posted on 9th October 2017 in Business
Written by Freya Hughes
Ever feel like you’re free falling through business life, with no firm grip on what’s happening? Well, you’re not alone. If your cash position is worrying you, or you’re not sure on the best move to ensure you’re in the safety zone then look no further. In this blog we’re outlining what free cash flow is, the best ways to increase it and how to get your feet on solid ground.
Free cash flow is an indicator of a healthy business, and a sign of your profitability. It’s what’s left over after all of your expenditures, like office rent, bills, kit, taxes and anything else you may need to pay for to operate. But, don’t confuse it with your net cash flow which is the profit you have after your expenses, but not counting any long-term debts or bills. To have free cash flow means you’re doing well, and will likely attract investors so it’s certainly worth pursuing. Not only that, you could use your excess cash to reinvest in your company – expanding, growing your team or paying dividends to shareholders.
We’ve all heard the expression ‘cash is king’, and for good reason. Without a healthy cash flow, you’ll be teetering on the edge of failure. If you have a negative free cash flow, you’re not generating enough cash to sustain your business. This is seriously worrying so should be at the forefront of your decision making. Get this wrong will see you closing your doors pretty soon. But how are you going to increase your free cash?
Strategise your landing
You need a strong operational plan to adhere to, so you know how much free cash to expect. Cash flow forecasting your predicted figures is going to help you to stay on the right path, as this tool works from your actual data. Working from fact, you can see exactly where you may have missed opportunities in the past. Because your outgoings are going to be fairly set, it becomes easy to see what’s going to be going out of your bank account each period, so you can look at ways to pull more cash into your company.
Once you have a solid strategy, you’re going to be in a much better position. Seek the help of a management accountant to help you set strategic goals for you and your team, for short and longer term periods of time. Think of them as your instructor – if you’re into skydiving, for example, they’d be the one strapped to your back ensuring you don’t plummet to your death. They’re a bit like a personal trainer for your business.
As the business owner, you can be too close to the business to see objectively what you need to be doing. Changing habits can be tough, but it’s worth it. Look to be doing things like:
- Get someone focused on your payables and receivables. If either of these are neglected, you definitely don’t have an accurate view of your figures. If your receivables are never received, you’re making a loss and won’t necessarily be able to pay for your expenses.
- Get a forecast to project where your business could be, and should be. As mentioned, you can set up your forecast to run off your historical figures, so you can get the most accurate forecast possible.
- Use scenario planning (more on this later) to explore the outcomes of various different eventualities. By creating a base scenario, project best, worst and middle case outcomes for a plethora of issues or opportunities. This is an amazing way to make decisions with confidence, and will help you think outside the box for answers. You always need a plan B in business, and this is the way to create it.
A management accountant, or advisor, will help you steer past obstacles. They’re there to aid you with risk mitigation, and will help you to keep an eye on your performance as a business, but also by department and by individual employee.
Other ways to increase your free cash flow are more focused towards what you’re doing day to day…
Have you got a parachute?
Assess your overheads
Can you make savings in your business? Sometimes a fancy office, or spending a load of your money on a big marketing effort will see your cash leaving your accounts almost as quickly as it’s coming in. Do you really need these things? Look at your scenarios and see if making minor adjustments to your outgoings will make a difference over time. If your business relies on one-off transactions (rather than being able to rely upon monthly recurring revenue) then money will be a near-constant worry, so this is going to be the easiest way to save.
Assess your profitability per product or service
If your pricing is off, you’re going to feel the pinch. You may find you’re able to up your prices, which could be very beneficial when you’re low on cash. Check out what competitors are charging for similar goods, and using benchmarking will show you industry averages to give you an idea of where you stand against the average.
Pulling the cord: make sure you’ve thought about safety
If your suppliers bump their prices, can you source your stock elsewhere for cheaper? It’s unavoidable at times, but it’s best to always be shopping around. Are there any ways of restructuring your services to bring in more cash any quicker? Monthly billing can not only make your life easier, but offers like a three-month deal discount could help things amp up significantly.
All of these changes can be plugged into your forecast. In creating this initial forecast, you’ll have a prediction of revenue for the next year. You can drill into this data to see exactly what each and every decision you make will mean for your business. When you can see a graph displaying your actual results and compare it to where you’d like to be, it gives you a massive amount of motivation to achieve it.
From here, you can use scenario planning. Each and every one of your scenarios can be compared, so you know that you’re making the best call with each decision. After creating your base scenario, you can then explore variations by linking together multiple scenarios and explore the ‘what if’ options. No more lying in bed wondering ‘what would happen if I did X, Y or Z’, instead get the answers you need, all based of hard data.
Land safely with KPIs
If your margins are tight, and you’ve already started making savings across the rest of your business, then there’s one fantastic way to keep everything in order, and in your full control. Welcome to the table, key performance indicator (KPI) measurement.
KPIs are quantifiable measures that show you how well your business is meeting set operational and strategic goals. They’re a breakdown of your business, allowing you to see the performance of each department, even individual employees. You’ll find tracking performance becomes a lot more manageable, as looking at your company as a whole can be overwhelming. KPI measurement will highlight problem areas – and those that are doing well – and they’ll be easy to spot when broken down. Have your departmental managers keep tabs on the results to save you time, and as KPIs can be both financial and non-financial, you’ll know every variable is being watched.
You’re looking to up the efficiency growth, health and resilience of your business. Have you been looking at these areas when checking your performance? Because they’re all related to one another you’ll know the correct KPIs for you when you are choosing them. Remember – your business is unique, therefore your KPIs should be too.
Input your KPIs into your forecast. You must do this so you can see how the results compare to how you thought they might. If you’re seriously lagging with actual results, compared with your projections, the granularity will display the issues. But don’t just take our word for it, as our community of business owners are all about KPI measurement. We’ve spoken to a few, who really understand the value of KPIs, and how they give you a grip on your numbers. This in turn allows you to save every penny of your free cash flow to do with what you please. But seriously, you should reinvest!