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A Turnaround Consultant Discusses Improving Business Cash Flow to Repay Debt

Improving Business Cash Flow to Repay Debt – Advice from a Turnaround Consultant

First Things First – Get Real About Your Finances

Before you can fix the problem, you need to understand the full scope of it. Take a hard, honest look at your financial statements – your income, expenses, assets, liabilities, everything. Leave no stone unturned. This allows you to see exactly where the cash bleeds are happening.

Often business owners realize their financial data is disorganized or inaccurate once they do a deep dive. Now is the time to get your books in order. Implement a good bookkeeping system or work with an accountant to reconcile errors. Garbage in, garbage out – so get the data right.

Trim the Fat – Reduce Expenses

Ok, you’ve identified where the cash is going out. Now it’s time to tighten the belt and cut some of that spending. We’re talking trimming the fat here – eliminating non-essential expenses. This might include:

  • Ending projects or activities that are losing money or have low ROI. Time to quit throwing good money after bad.
  • Renegotiating contracts with vendors and suppliers to get better rates. Don’t be afraid to push for discounts if you offer early or bulk payments.
  • Cutting back on bonuses and compensation, if necessary, until cash flow improves.
  • Reducing inventory that isn’t selling quickly. Less inventory = less carrying cost.
  • Decreasing marketing budgets temporarily and doubling down only on the highest ROI activities.
  • Subletting office space if you have unused capacity.
  • Suspending planned capital expenditures that aren’t urgent.

You get the idea. Look at every expense with a critical eye and trim wherever you can. Small cuts add up to big savings over time. This frees up cash that can be allocated to paying down debt.

Boost Sales – Increase Revenue

Now it’s time to shift focus to the other side of the cash flow equation – sales and revenue. Ultimately, the best way to improve cash flow is to sell more products or services. Here are some strategies to ramp up sales:

  • Launch targeted promotions to draw in new customers and incentivize repeat business. For example, limited-time percentage discounts or bundled product offers.
  • Tap into new sales channels, like online stores or sales reps, to expand your reach.
  • Offer payment plans or financing options to increase affordability.
  • Focus sales efforts on your most profitable products and services. Push these hard.
  • Explore government contracts or grants if you operate in certain sectors like manufacturing or tech.
  • If you have a sales team, motivate them with commissions, contests, and aggressive (but realistic) sales targets.

Diligently monitor sales metrics and results from these initiatives. Double down on what works and quickly eliminate what doesn’t. Agility is key when cash is tight.

Collect What You’re Owed – Improve Accounts Receivable

Don’t let outstanding customer invoices and late payments siphon away cash. As the saying goes, “cash is king”, so collect what you’re rightfully owed.

First, tighten up your invoicing procedures to get paid faster:

  • Shorten payment terms in your contracts – e.g. net 15 days instead of net 30.
  • Offer a small discount for early payment. Even 2% makes a difference.
  • Require partial upfront deposits, where feasible.
  • Set up automated payment reminders to reduce late payments.

Also, stay on top of past due accounts by:

  • Following up frequently via phone, email, letters, etc. Persistence pays off.
  • Offering incentives for customers to pay immediately, like discounts or free products.
  • Working out payment plans if customers are facing hardship. Some money is better than none.
  • As a last resort, hiring a collections agency or pursuing legal action for severely late accounts.

Collecting what you’re owed quickly can significantly improve cash in hand to cover obligations.

Buy Inventory and Supplies Leanly

A common cash flow pitfall is buying too much inventory or overspending on supplies. These are sunk costs that tie up money unnecessarily. Take steps to reduce this waste:

  • Only purchase inventory once you have a confirmed order or near-term need. Don’t stockpile excess “just in case”.
  • Negotiate with suppliers for lower costs, bulk discounts, consignment/drop-ship arrangements, or extended payment terms.
  • If you maintain inventory, monitor turnover diligently and liquidate stale or obsolete items.
  • Limit supplies to essentials only and keep minimal safety stock. Don’t hoard extras.
  • Substitute cheaper supply options when possible – for example, generic ingredients instead of brand names.
  • Set up alerts to notify you when inventory or supplies drop to predetermined reorder points.

Avoiding unnecessary purchases improves cash flow directly. It also reduces carrying costs like storage fees, insurance, and spoilage.

Talk to Your Lenders – Seek Better Terms

If you have outstanding loans or debts dragging on cash flow, talk to your lenders about restructuring terms to free up money. Be proactive about this before you default or things get dire. Lenders want to help good customers, so if you have a reasonable request, they may work with you.

Options to discuss with lenders include:

  • Lower interest rates to reduce monthly payments. Sometimes a simple rate reduction can help tremendously.
  • Longer repayment periods to decrease monthly outlays.
  • Adjusted payment schedules to coincide with your cash inflows. For example, seasonal businesses may need lower payments at certain times of year.
  • Refinancing debt to a lower-interest option. For example, moving credit card balances to a line of credit.
  • Temporary interest-only payments while you improve cash flow.
  • Penalty-free forbearance for a short time period if you need a break.

The key is communicating openly with lenders and demonstrating you have a viable plan to repay under new terms. This builds trust and goodwill.

Make Strategic Cuts to Inventory – Liquidate Slow Assets

For businesses that rely on inventory – retailers, manufacturers, distributors etc. – identifying and liquidating slow-moving inventory can quickly unlock significant cash. You want your inventory investment tied up in products that sell, not stagnate on shelves.

Take time to analyze your inventory reports and identify slower sellers. Consider strategic markdowns or promotions to liquidate these items. Outlet stores, online auctions, and bulk sales to discount retailers are all options too.

In some cases, you may decide to write down or dispose of inventory that simply won’t sell. While this is painful, it’s better than sinking more costs into dead stock. The freed up cash can then be redirected to more productive uses.

You can also run this same exercise on assets – equipment, vehicles, furniture etc. If you have assets sitting idle that someone else could use, look to sell them and channel the cash to urgent needs.

Slash Discretionary Spending – Tighten Your Belt

During cash crunches, it’s natural to focus on cutting large line item expenses. However, don’t underestimate the impact of reducing discretionary spending. Those smaller daily costs add up.

  • Pack lunch instead of eating out. Bring your own snacks and coffee.
  • Institute a temporary hiring freeze and avoid raises.
  • Freeze new projects and initiatives unless they are revenue-generating.
  • Place a moratorium on unnecessary travel and entertainment.
  • Reduce your real estate footprint if you have unused offices.
  • Scrutinize every expense report and purchase order. Reject anything non-essential.
  • Stop magazine subscriptions, gym memberships, and other monthly services you can live without temporarily.

Getting in a lean, frugal mindset across the company saves meaningful dollars during cash shortfalls.

Invoice Faster – Speed Up Cash Inflows

As a complementary strategy to collecting receivables faster, look at your billing and invoicing processes. Are you sending invoices promptly after delivering products or services? Dragging your feet creates gaps between when revenue hits your books and when cash hits your bank account.

  • Set up your accounting system to generate invoices immediately when work is completed. Don’t let them pile up.
  • If you offer installment billing, invoice each installment separately to get paid faster.
  • Offer customers discounts for paying within 24 hours of receiving an invoice. You’d be surprised how many take you up on this.
  • Automate reminders to be sent 3, 10, 15 days after invoices go unpaid. Don’t let customers forget.
  • Charge late fees on overdue invoices per your contracts. Enforce these consistently.
  • Accept credit card or online payments and process them quickly.

The faster you bill, the faster you get paid. Don’t leave money sitting on the table longer than necessary.

Outsource to Reduce Labor Costs

Wages, salaries, and benefits comprise a huge chunk of expenses for most businesses. While you don’t want to resort to layoffs unnecessarily, there are ways to reduce labor costs without cutting employees.

Specifically, look at outsourcing or contracting certain tasks that don’t require your employees’ time and expertise. This may include:

  • Accounting, bookkeeping and payroll
  • Tech support and IT services
  • Janitorial and facilities management
  • Marketing and graphic design
  • Data entry and other administrative tasks
  • Delivery and logistics

Carefully determine what skills you need in-house vs. which can be outsourced temporarily during cash crunches. You can even outsource to offshore providers to save more on labor costs. This adds flexibility to scale up or down.

The goal is to focus your top talent on mission-critical activities while contracting out the rest. This reduces headcount expenses and frees up cash.

Offer Discounts for Upfront Payment

If you really need cash immediately, try offering customers discounts if they pay for products/services upfront instead of on credit. You sacrifice a small margin, but gain the benefits of immediate payment, certainty of payment, and improved cash flow.

Upfront discounts are commonly used by:

  • Contractors – 10% off if you pay the full project cost upfront instead of progress installments.
  • SaaS companies – two free months if you pay annually versus monthly.
  • Service businesses – 5% discount if you purchase a block of 10 sessions in advance.
  • Retailers – reduced price when you buy 3 or 5 units together versus piecemeal.
  • Manufacturers – volume discounts for large upfront orders.

You have flexibility in how deep of discounts to offer based on your margins. Do the math to ensure you still come out ahead based

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