If you consider the movement of cash in your own business, you’ll realise the flow is distinctly cyclical: cash usually goes out on wages, stock and expenses before it comes back in the form of customer payments – hopefully, in larger amounts. So, the key is to optimise this flow so that your business has enough cash to comfortably function while at the same time maximising the returns to you as the business owner. To help you do this let’s focus on the three main cycles:

• the sales cycle – the time taken from a sale being made and the cash being received;
• the purchase and production cycle – the time taken from the order of stocks, materials and other supplies and the cash being paid; and
• the overheads cycle – the time between the wages and other expenses being incurred and the cash being paid.

There is not usually much we can do regarding the timing of overhead payments as most of these have to be paid every month. However, when it comes to the sales and production cycles, through careful planning it is possible to significantly affect your cash flow for the better. As you might expect, our aim should always be to keep the sales cycle as short as we can by collecting customers’ cash as soon as it is due and to make the purchase cycle as long as possible – not by paying suppliers late, but by keeping our stocks low, negotiating the most favourable payment terms possible and by not paying any bill until it is actually due.

Many businesses typically buy or manufacture stocks in advance of receiving orders for them. Depending on the type of business, this may be inevitable (i.e. if you own a shop, clearly you have to put stocks on the shelves in order to sell them), but there is a fine line between having enough stock to fulfil a customer’s order and having thousands of pounds tied up in items that simply collect dust on your shelves for several months or, in some cases, years. To optimise this, take a close look at your supplier lead times and compare this to your customers’ delivery expectations. The shorter your supplier lead time, the smaller the requirement for you to hold those items in stock. And if certain lines are slow-moving or obsolete sell them off, collect the cash and move on.

You should also take a moment to consider the payment terms you offer your customers. Can customers be incentivised to pay quicker or even upfront by offering discounts? Can you make it easier for customers to pay (and guarantee timely payments) by accepting credit cards, standing orders or direct debit arrangements? And, above all else, make sure you have someone on the case every week chasing up those outstanding debts.

Although the above points are pretty straightforward, many businesses regard them purely as ‘admin’ and neglect them in favour of the day-to-day operations. However, you can have the best product in the world, the smartest marketing and the hottest sales force, but if a customer doesn’t end up paying you, that sale will leave you considerably out of pocket. By keeping your eye on the ball, you’ll soon find your business will need significantly less cash to function, allowing you not only to build up a war-chest for when things get tough, but as a business owner, you’ll be able to put more cash back into your own pocket – no doubt why you went into business