Cash flow is the lifeline of business. It can be compared to the fuel that keeps an automobile engine running, the blood circulation that ensures the human physiological environment is active, and the air that powers the ecosystem. Cash flow represents money coming in and out. Where the flow (coming in and going out) of money is inconsistent with operational demand, businesses get stuck. The ‘busyness’ in business recedes. Operational excellence tanks.
The preceding isn’t a great position for businesses of all sizes. Hence, effective cash flow management is critical to sustaining and scaling a business. It can determine employee satisfaction. It can determine management health. Without achieving positive cash flow, no business can meet its projections effectively.
Even profitable companies can fail if they cannot pay immediate bills such as rent, suppliers, and payroll. This is why successful entrepreneurs don’t joke with cash flow management. Richard Branson advised, “Never take your eyes off the cash flow because it’s the lifeblood of business.”
Jack Welch said, “Too often we measure everything and understand nothing. The three most important things you need to measure in a business are customer satisfaction, employee satisfaction, and cash flow. If you’re growing customer satisfaction, your global market share is sure to grow, too. Employee satisfaction gets you productivity, quality, pride, and creativity. And cash flow is the pulse—the key vital sign of a company.”
Renown management consultant, Peter Drucker, pointed out, “Entrepreneurs believe that profit is what matters most in a new enterprise. But profit is secondary. Cash flow matters most.”
Those men understand the importance of positive cash flow in optimising performance in business. They sure have a point. Market research reveals that 82% of businesses fail due to poor cash flow management. It is an awful lot. 82% market failure rate due to poor cash flow management is a bombshell. This should get every business owner thinking about what can be done to avoid the traps.
Let’s get thinking. The key components to keep in mind regarding cash flow situation management include positive cash flow, which indicates that more money is entering the business (sales, investments) than exiting (expenses); negative cash flow, indicating more money exiting than entering, often leading to financial strain; and cash flow Cycle which measures the space between the time clients make payment for goods or services.
We take the discussion further from the angle of the cash flow cycle. When the space between purchase and payment grows wider, the cash flow situation can take a hit, as the business finds itself investing more into operations than it is receiving in rewards. Considering the scenario, it is only a matter of time before value dips.
As you know, businesses’ debt tolerance levels differ. The cost of money hanging unpaid somewhere may be costing more in real time than ever factored in. This calls for an effective cash flow management strategy. There are no doubts many ways to prevent negative cash flow. However, a pricing strategy can help in a way. Here are three pricing strategies I would like to manage your cash flow situation:
- Cash Discount – Many clients are wired to respond to incentives favourably. How about announcing a price reduction for those who pay their bills promptly? A typical example is a “2/15, net 30” cash discount model, which means that although payment is due in 30 days, buyers who are able to make payment within 15 days can deduct 2 per cent of the bill. If your cost structure can tolerate a 2% discount for faster payment, I think this is worth considering to close that huge gap between patronage and payment.
- Quantity Discount – You can improve order quantity to improve sales possibilities. One of the ways to do this is to offer a price reduction to buyers who buy large volumes. Such a discount provides an incentive for customers to place all their orders with you instead of connecting with competitors. Doing volumes improves profit expectation and calculation.
- Seasonal Discount – If you operate within a market that witnesses a surge at certain seasons, it is important to incentivise customers to do business off-season. Hotels, airlines, and manufacturers can offer seasonal discounts in their slow-selling seasons to demotivate lull. This approach enables businesses to keep operations steady for the entire year with a positive effect on cash flow.
