Cash flow from operating activities is how most businesses create cash flow.
If business operations can’t generate cash flow, your business will eventually fail, even if you generate cash flow from investing and financing activities.
Because the owner cannot continue investing in the business, and if the business does not generate profit and cash, then no investor would want to invest either, as they cannot get any return on their investment.
The best thing an entrepreneur can do to avoid being in such a scenario, where your business is not generating profit and cash, is to be proactive and prevent cash flow mistakes in the operating activities area of the cash flow.
10 common cash flow creation mistakes to avoid in operating activities
To win in creating cash flow from operating activities, avoid the following ten common mistakes.
1. Billing fully in arrears
This refers to the timing of invoicing your client.
For example, if you invoice the client fully in arrears, you wait for the cash to hit your account. Whereas if you can invoice upfront, you will have cash in your bank much quicker.
2. Not able to optimize profit into cash flow fast
Profit and cash flow are the two sides of the same coin. Profit is sales minus costs, and cash flow is cash inflow from sales minus cash outflow to cover costs. But profit is not cash flow.
Profit doesn’t mean anything unless it is converted into cash flow. The timing difference, referred to as the cash conversion cycle, makes the difference between profit and cash flow. So have robust credit control in place.
3. Incomplete invoicing
How many times have you received an incomplete or inaccurate invoice?
Either there’s a purchase order missing, or it is sent to the wrong person? This delays getting invoices approved for payment, so there is a delay in getting paid.
4. Not checking your customer’s creditworthiness
Just because you have made the sale doesn’t guarantee you will get cash.
It is not uncommon that the customer can’t pay. So check your customers’ creditworthiness before working with them.
You can check in companies house in the uk, where they record how long the business is trading. You can also check with credit reference agencies for businesses like creditsafe, experian in the us, and other countries.
5. Not focused on credit control
I remember going through the cash flow statement of one of my clients, a marketing agency in london.
The founder, steve, said, “shishir, i need to focus more on sales as the cash balance is not great.”
I said, “steve, no, you need to focus more on credit control now. You have £75k as debtors’ balance due for payment, and it’s roughly your three months of sales. Have credit control in place to get the cash in, and you will improve your cash flow. In addition, you need an internal system and process to make calls or send emails for follow-up.”
Steve focused on the credit-control for the next two weeks, and he collected £47.2k from his clients, which was enough to get the business going for a few months. Less stress was a bonus for him.
6. Fix cash leaks
Imagine a leaky bucket with water filling in and leaking from the bottom simultaneously. It can’t hold water for long.
A business leaking cash does the same to cash flow. So even when you have cash coming in, you’ll continue facing a cash crunch like a client of mine in such a business.
He told me that he was paying the business rates on behalf of his office sublet, where clearly, these payments were the tenant’s responsibility. Over 2.5 years, he had paid £17,215. He would have been better off with cash in his bank account rather than paying for someone else. It was a leak that had to be fixed fast.
To avoid being in such a situation, regularly go through your cash flow statement to identify cash leaks in your business. Look for places where you are paying money where you should not be.
Do you need to make a call before a payment can be stopped but did not do so because you thought it was a small monthly payment? Don’t delay such calls or emails because small payments add up. Instead, prioritize fixing all-cash leaks, and soon your cash bucket will be filled with cash.
7. Make it easy for customers to pay
Make it easy for your clients to pay you.
Give them options. As entrepreneurs, we are always struggling for time and patience. If someone sends me an invoice to pay with only their bank details then i have to go through the usual process of bank transfers – login to my bank account, add the new beneficiary, come back later to carefully enter the payment amount, before payment can be done.
This only takes precious time but also takes me away from whatever i could have been doing at that point.
Whereas if someone provided more straightforward options like paypal or stripe, i just have to log in to my account and press pay. I am more likely to pay them much quicker because i just want to get it done and move on. So when you offer multiple options to pay, your clients are more likely to pay you quicker. When this happens, your cash flow will improve.
8. Scrutinize expenses to target recurring expenses
I saved £614 in one hour.
I spent an hour going through the expenses for the last six months and discovered that i was paying £614 for subscriptions across multiple services that i didn’t use anymore. It was easy to forget these things if i hadn’t scheduled that one hour to look through my expenses. So i improved my cash flow by £614 just by scrutinizing expenses.
You can do the same in your business. With only 30 minutes of scrutiny of your accounts, you can add hundreds or thousands of pounds to your cash flow.
This is pretty much the easiest thing you can do in your business to improve your cash flow. It’s so simple that you’ll be surprised why you didn’t do it earlier.
9. Charging too little for your product or services
Cash flow margin plays a crucial role in the stability and sustainability of the business.
If you are charging too little, you will not have the cash to re-invest in marketing to generate more leads and sales and, therefore, more cash flow.
Now that you know the cash flow mistakes to avoid let’s look at the strategies you can implement under operating activities to improve your cash flow.
10. Not checking the time lag of inventory turnover
If you sell physical products, pay attention to how quickly the inventory turns over.
If the inventory is turning over quickly, then the inventory is selling quicker, which means there’s a faster cash return on investment of purchasing the stock.
If the inventory is not sold quicker, inventory turnover is slow.
Here are some of the things you can do about it.
- Return inventory to the supplier
- Change the frequency of purchase to match sales volume roughly. You can do this by going through your sales in the last two quarters.
- Sell the inventory items for less than the cost price as clearance sales.
- Write off the inventory. This will increase costs and therefore reduce profit and reduce tax liability.
In this section, we looked at the ten common cash flow mistakes business owners make when managing operating cash flow.
Next, i will share ten cash flow strategies to improve your operating cash flow so that you have enough working capital to keep your business running smoothly.
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10 strategies to improve your operating cash flow
[strategy 1] sell your knowledge and experience
Sell your knowledge and share insights you gained through your experience by offering group coaching, 1-on-1 mentoring, or an online course.
If you are a fitness coach, you no longer have to serve your clients in person. Instead, you can package your knowledge in the form of a self-serve course that clients can watch and follow on their own time, wherever they are. You can also train others on how to become fitness coaches.
Joe wicks (also known as the body coach) began “pe with joe” on youtube to help children stay active during the pandemic lockdown. He was already successful, but “pe joe” took his brand even to greater heights. Wicks was awarded a guinness world record for “most viewers for a fitness workout live stream on youtube” after achieving over 950,000 viewers on 24 march 2020 for his 2nd live stream.
Someone focused on growing cash flow from operations can create multiple streams of revenue. It can be a mix of consulting, group coaching, and on-demand programs.
[strategy 2] focus on your most profitable products
Do a deep dive into your business, and look at products and services bringing cash in.
You’ll notice that not all products and services you sell are equally profitable.
For example, you could be selling 100 units at £10. So that’s £1000. Or you could be selling 100 units at £100 each. That’s £10,000.
You want to concentrate on a £100 sale, i.e., your most profitable product that will bring in more cash flow in your business with less time and energy. But that is only one part of the equation. Also, look at the cost of fulfillment. How much cash does it take to deliver your product or service and fulfill the promise that you made to your customers?
Look at cash-in and cash-out product-wise and focus on the one for which the cash that remains after taking care of the fulfillment cost is the highest.
That way, you’ll know what your most profitable product is. Focus on that.
[strategy 3] go 100% online
This is for brick-and-mortar businesses—the ones operating on a completely offline model or a hybrid online-offline model. I see many businesses on the hybrid model. For example, one of my clients, a marketing agency in west london, had a physical office pre-covid, with ten employees working there. After the pandemic hit, they decided to cancel their office lease. They moved entirely online and started using slack and trello to communicate and collaborate with ten employees and 19-20 freelancers.
They are also doing all their accounting online.
In the process, they are saving a lot on overhead expenses. They don’t have to pay rent anymore. Because they are working more and more with freelancers, they don’t have to bear social security costs like employees. This saving has added to their cash flow, and it has improved considerably since then.
You can do the same in your business.
[strategy 4] improve customer trust with milestone payments
Nowadays, people are skeptical about spending their money. They want certainty. And they want to get things done as expected.
So rather than saying, “okay, i’ll give you x number of hours,” you can promise a milestone. And then you can say, “when you reach milestone a, pay me x amount, and when you reach, pay me y and so on.”
This way, you can offer more certainty to your customers. This will improve your cash flow and improve customers’ trust in your ability to deliver because you provide the transformation they need and solve their problems.
So milestone payments work great to improve cash flow at times like we are experiencing now.
[strategy 5] move clients from rolling contracts to retainer fees
Instead of working with clients on an ongoing basis on a rolling contract, work on a retainer.
In the case of a rolling contract, you don’t have a surety of whether the client will stay with you next month or not, but you are sure of monthly cash flow in the case of a retainer.
When you move from an ongoing client from a rolling contract to a retainer, you tell them, “i’m going to provide you a, b, c, d e, and this is what i’ll bill you every month.”
This way, you are sure of a certain cash flow coming into your business every month. Then you can invest that cash and use it to grow your business. For example, you can bring an extra helping hand on board or run a marketing campaign. Because, you know, what kind of cash will come in the business next month instead of not knowing whether the rolling contract will continue or end next month
Clients are happy because they will not see any surprise invoices while knowing what value they’ll get as part of the monthly retainer.
With the retainer’s financial confidence and ongoing cash flow, you can invest in growth and compound the value.
[strategy 6] get help from a financial expert
It takes money to make money.
If having an extra pair of eyes can help you improve your cash flow 10x, would you do that?
It is like investing £500 and getting £5000. So i’d say even if your improvements by getting financial advice are not in multiples and are marginal, like 10% or 20%, you should take it.
Because if you don’t, you’ll leave money on the table.
Understand the difference between cost and investment. Even on a smaller revenue base like £50,000, a 20% growth means £10,000, and that is possible if an experienced eye looks at your numbers and makes some adjustments.
Even after taking care of the investment for financial advice, you’ll take £6-7,000 extra than if you did not have financial advice.
I have invested a lot in my personal and business growth. I never see that as a cost. Why would i want to buy a cost? I want to invest. That’s my advice to you.
Invest, don’t buy a cost. If you are not sure about the difference between the two, bring in someone who knows this well.
[strategy 7] systemize your business to focus on cash-generating activities
Do you feel your business is stuck because you are the bottleneck and want to serve more clients and get more cash flow?
To do it, systemize your business, and focus on getting new high-paying clients.
I know you are an experienced expert who knows how to serve your clients, but you may not know how to run your business.
Clone yourself to run a business that generates cash for you. To do it, bring an operator, who can do most of your job. In addition, it releases you from being the bottleneck in your business.
To bring an operator, you need cash flow margins which many entrepreneurs don’t have because they don’t charge enough.
So, to systemize your business by cloning yourself as a busy entrepreneur, charge enough to make hiring the operator viable.
[strategy 8] | track your incoming and outgoings
I’m sure you have heard the expression: “what gets measured, gets done.”
So, track your incomings and outgoings to understand which of your services/products are generating more cash flow, which type of expenses are bleeding cash, and can they be avoided without affecting day-to-day operations?
One of the cash flow mistakes busy entrepreneurs make is not prioritizing this task.
When you are always pressed for time, and your to-do list keeps on piling up, the task of tracking incoming and outgoing is the last thing on your mind.
I believe we never have enough time in our lives to do all the things we want to do or should do. So we have to prioritize our time to do what’s important.
In this case, it is tracking incoming and outgoing.
[strategy 9] require down payments on large orders
When you secure a large order, make sure you collect the down payment to support your existing cash flow to deliver your promise to your client.
If you wait to complete the work and then ask for a payment, you may not have sufficient cash to support the operations. In addition to this, there is a risk your client may not be able to pay in full when it’s due.
[strategy 10] customer retention
It is so much easier to sell to convince your existing customers who have already bought from you and liked the product than convincing a new customer, who hasn’t had an experience. So pay attention to customer retention rate.
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In this section, we looked at cash flow from operating activities, common mistakes made, and strategies to improve cash flow from operating activities.
Cash flow from operating activities is the most crucial part of cash flow activities. This is because a business gets working capital, and working capital is what keeps a business running.
Without sufficient working capital, business comes to a standstill. So you must avoid common cash flow mistakes as some mistakes may be too costly. However, i believe having gone through the mistakes and strategies discussed above; you are on a path to building a cash flow stable business.