Most articles published about maximizing cash in a business focus on managing the balance sheet (i.e. collecting accounts receivable, reducing inventory levels, extended payment terms, etc.). While managing these accounts is important, it does not reflect how cash is generated in the business. There are three sources of cash in any business: from lenders, from investors and from profits. Lenders and investors provide cash to fund growth. However, these funds must be repaid with interest or dividends. The only organic source of cash in a business is from profits generated through the business’s operations. Therefore, it is important to earn a sufficient profit to generate enough cash to sustain the business.
Many business owners focus on increasing revenues, sometimes at the cost of profitability. Oftentimes, their revenue growth strategy is based on price reductions. But, lower prices result in lower profit margins and less cash generated from each transaction. Successful businesses find ways to make their products and services unique in order to maximize the prices they charge. The key is providing more value for your products and services than your lower priced competitors. This requires understanding your customers’ needs and ensuring that you fulfill those needs. Believe it or not, most customers will not switch vendors based on price if your product offers them more value. Those that do switch based on price are often the type of customer that drags down profitability due to high maintenance costs.
The other way to maximize profitability is to minimize costs. Review your costs regularly and look for ways to reduce or eliminate costs that will not negatively impact the value of your goods or services. Even the simplest changes can make a large impact on profitability. Jim Sinegal, the founder of Costco, noticed that round product containers stacked together on a pallet left a lot of wasted space in between them. The company switched to shorter, square containers allowing more containers on a pallet resulting in lower per unit shipping costs. Reviewing long standing processes can identify those that can be automated to increase productivity while providing better results. If the investment in the equipment to automate a process is not cost effective, consider outsourcing to a business that has the equipment. Another strategy to reduce costs is to partner with your suppliers to develop ways to reduce the cost of the items you purchase from them. Quite often they can identify modifications in the product or the way it is delivered to reduce your cost. The objective is to control costs in your business while providing the greatest value to your customers. You will be rewarded with increased profitability maximizing the cash your business generates.
Every business is different, so each business should develop its own individual strategy to maximize profitability and cash flow. A B2B CFO® partner is a seasoned professional who can help you identify a strategy that best fits your business. Contact one of our partners to see how we may be able to help you and your business.