7 Ways To Improve Business Cash Flow And Working Capital

Monitoring cash flow and ensuring it is positive is essential to the financial health and success of any business. But surprisingly, a majority of entrepreneurs have only a hazy idea of the direction in which this crucial parameter is heading.

Alan Miltz is an acknowledged banking and finance specialist, who has developed analysis techniques for tracking cash flow. His methods are currently being used in 22 countries by over 20,000 users including leading banks, accountants and corporations.


In an interview with SeedIn, Alan Miltz has explained the steps businesses are required to take if they are to remain profitable and cash positive:

1. Measurement Of The Success Of A Business

Most business owners would say that the profit reported by their company in its annual accounts is the best indicator of how well it is doing. But profit is only one part of the story and there are three other critical factors to be considered.

Working capital needs to be closely monitored if a business is to survive and prosper. Specifically, there is a need to keep a tab on the number of days of inventory held, how many days it takes to recover dues from customers and the time a business can take to pay off its suppliers.

The third important area requiring attention is the management of non-current assets. If a company has money blocked in non-productive land or buildings, it will drain its resources without producing any corresponding return.

A combination of the company’s profits, its working capital management and the extent and productivity of its non-current assets will yield the cash flow the company is producing.

The Greatest Error

A business owner could make is to monitor only his profits and ignore the remaining three components which determine his company’s financial and strategic success.

2. High Profits May Mide A Negative Cash Flow

Many companies make large profits and show healthy growth in their revenues but have negative cash flows. If a business exhibits these characteristics, it can lull the owner into a sense of complacency as he will see only the increasing net margins and not realize that these are only paper profits.

This is not an uncommon situation for growing businesses and is extremely dangerous. If the expanding revenues of a company result in a greater amount being deployed towards working capital, the increase in sales volumes is actually detrimental to the business.

Unless the organisation can bring down its working capital requirements, every increase in sales would result in the need for more cash.

3. The Way To Achieve A Positive Cash Flow

Unless a business has positive cash flows, it cannot survive for any extended period of time. There are only seven drivers influencing the amount of cash available in the system.

If a company is able to control these, it will succeed and set itself on the path to long-term growth.

The seven areas a business needs to address are...

 1. Marketing                                                                                          

2. Operations                                                                                        

3. Finance                                                                                              

4. Overheads                                                                                        

5. Collection of dues from its customers                                          

6. Inventory levels                                                                                

7. The time every business takes to pay its suppliers.

Businesses which successfully identify areas where it is possible to generate cash will see positive effects on their profitability and a reduction in working capital requirements.

But it is essential to quantify the impact that each of the seven drivers has on cash flow. Companies can do this with the ‘Power of One’.

4. The Power Of One

A business can leverage the power of one by quantifying the effect that a one day change or a one percent change in a particular driver would have on its cash flows.

For example, if a company is able to pay its suppliers one day later than it usually does, what would be the positive effect on its cash position?

Similarly, every extra day that inventory is lying with a business results in a negative contribution to the cash position. The impact that each of the seven drivers will have is required to be calculated and internalized by the company’s staff.

Once this is successfully done, a business will know the effect of a one percent rise in sales volume or a similar increase in sales price. In the same manner, if customers pay their dues a day earlier than usual, the exact dollar amount of cash flow benefit will be known.

An analysis of all seven drivers in this manner will guide a business in achieving its goals.

5. The End-Use Of Borrowed Money

Businesses in the growth-phase are always cash hungry. While this is not necessarily a bad sign, it is important to understand what the cash is being used for.

If every increase in sales is accompanied by a disproportionate rise in customer dues it is a sure sign of poor working capital management.

In fact, a company needs to understand whether borrowed funds are being used to generate positive cash flows or are merely the result of the power of one moving in the wrong direction. If this is the case, borrowed money would be deployed to finance wrong management decisions instead of contributing to the company’s long term growth.

6. Profits Versus Cash Flow

All business owners and the senior management of companies are familiar with their revenue and profit figures. There is no ambiguity about these numbers but the same cannot be said about an enterprise’s cash flow.

The first step any business should take is to ensure that every staff member is aware of to the power of one, as it pertains to their area. The price at which goods are sold and sales volumes, fall within the domain of the marketing department.

Cost of goods purchased is handled by operational personnel and overheads are the responsibility of every department. Receivables fall within the ambit of accounts and marketing, and inventory is handled by operations.

When the entire organisation is aware of the dollar impact of their actions with respect to cash flow, the company will be in a position to achieve its strategic goals.

7. The Link Between A Company’s Strategy And Its Cash Flow

The strategic goals of a company need be aligned with the power of one. Every 1% increase in sales or a reduction of one day in inventory holding will make a contribution towards what the business is seeking to achieve.

Ultimately, cash flow is a measure of the success of a company’s strategy. If cash generation is positive, the strategy is correct and the company has been able to reap the benefits of a well-implemented program incorporating the power of one.

Conversely, if cash flow is negative, it is necessary for the business to re-look at its strategy and suitably modify it to meet its goals.

It is important to remember that a positive profit and loss statement can hide a negative cash flow. Business owners who base all their decisions only on accounting records without giving due consideration to cash generation and its usage may be setting themselves up for a nasty surprise.

In the words of Alan Miltz, ‘Revenue is vanity, profit is sanity and cash is king’. A business can thrive and grow if it conducts all its activities keeping in mind the impact that they will have on its cash position.

If a business is able to create a culture of cash flow excellence it will be in a position to use its resources to finance growth and be successful in meeting its strategic objectives.

Click Here To Read The Full Business Interview With Alan Miltz