I did a cash flow exercise the other day with a new client, and they were blown away by the simplicity of some cash flow enhancement techniques.

The company was a $6,000,000 manufacturer with approximately $600,000 in accounts receivable, $1,000,000 in inventory, and $300,000 in accounts payable. We calculated simple annual cash flow velocity (amount of time to turn a sale into cash and pay the respective vendor).

Right off the bat, we noticed that inventory seemed much too high, accounts receivable collections hadn’t been a priority based on the aging, and vendor terms could possibly be adjusted to improve cash flow.

Inventory

We looked at the inventory valuation and noted excess and slow-moving inventory. When touring the facility, I noticed that raw stock seemed high. Some of the excess inventory was pre-planned due to current supply chain issues. This made sense, but there were some inventory levels that could be reduced immediately. After our evaluation, the leadership made some decisions regarding purchasing reductions and are going to look at selling some of the excess inventory. If they can increase inventory turns and decrease days of on-hand inventory, they are expected to increase cash by $400,000.

Accounts Receivable

The next step we took was to look at their accounts receivable. With a little more attention to collections, they believed they improve the aging and could easily reduce DSO by 5+ days increasing cash by $80,000!

Vendor Terms on Accounts Payable

We looked at their accounts payable and determined we could push two of their main vendors’ payments out without any negative vendor impacts. We also noted a few of their vendors were offering 2% 10, net 30 terms. Our calculations showed that pushing two vendors out would increase cash by approximately $100,000 and by taking advantage of the discount terms offered by other vendors, the company would add approximately $36,000 of purchase discounts to their bottom line. See my previous discussion of purchase discounts here.

They were shocked by the impacts of these simple cash flow techniques, and how small gains can make a huge difference.

Your turn. Here’s how to increase your cash flow:

*         Ask your vendors for five more days to pay. See if they offer quick pay discounts.

*         Study your inventory levels and determine if it makes sense to reduce them and still be able to meet production and customer needs. Most companies have too much safety stock on hand.

*         Review your accounts receivable. Make calls to the slower paying customers not only for collections but to reframe your expectations. If they can’t comply, consider increasing pricing to cover the extra carrying cost or if the case is an ongoing challenge, it might be time to suggest they transition to another supplier.

You’ll be pleasantly surprised how much these few steps can help your bottom line. Contact me for a free chat about your current situation!