Cash Flow Creation: The Key to Small Business Growth

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There’s a secret to achieving the growth you want without the constant sales grind – and it’s all about cash flow creation.

Imagine having the cash to seize opportunities, invest in your vision, and sleep soundly at night…it’s all about cash flow creation.

It reminds me of a luxury sofa retailer family based in Knightsbridge. Bradly and Samatha (I have changed the name to protect the confidentiality of my clients) have been in business since August 2012. 

Fast forward as of now, the business has always been supported organically through cash generated from operations (money received from customers). Business has grown up to £5.6m turnover in 14 years. It has taken the business twelve years to reach cross £5m turnover. When I analysed the net profit and net cash flow year by year and then by quarter by quarter, I saw a missed opportunity.

Business could have opted for a loan of £250,000 at 3.75%. Loan amount could have been used add a new product line of chairs much sooner as chairs contribute 32.39% of sales revenue. Interest expense payable would have been yearly £9,375 which would have easily covered by extra cash generated. Bradley and Samatha would have crossed £5m by 2018 while still maintaining a similar net profit margin (Money that is yours after allowing for all expenses to pay).

As a cash flow expert working with small businesses for over last two decades, I see this scenario all too often. 

Most business owners think more revenue automatically means more cash flow creation, but that’s not always true. Here’s a common mistake I see many business owners make: over-reliance on sales for cash generation.

I’m Shishir Khadka, a chartered certified accountant turned cash flow expert, helping small business owners like you with cash flow creation, so you can continue to expand your business operations without financial stability stress.

The Lesson

Think of cash in the business like an accelerator pedal in the car. Just like when you press the accelerator pedal to go faster, you spend cash to scale your

Are you ready to unlock your business’s cash flow creation potential and fuel strategic growth?

Turbocharge Your Cash Flow Creation by Shortening Your Cash Conversion Cycle

Remember, your Cash Conversion Cycle (CCC) measures how quickly your business turns resources into cash. For a refresher on the details, [link to explainer article]. The shorter your CCC, the faster you have cash to reinvest in growth, reducing your reliance on loans or external funding.

Actionable Focus

To shorten your CCC, start by tightening up your collections process:

  • Clear & Timely Invoicing: Ensure your invoices are accurate, easy to understand, and sent immediately upon completion of work.
  • Follow-up Procedures: Put a system in place to track outstanding invoices and follow up promptly with customers.
  • Early Payment Incentives: Consider offering a small discount (e.g., 2%) for customers who pay within a short time frame (e.g., 10 days).

Remember Bradley and Samantha? Even a slight improvement in how quickly they collected payments could have unlocked their growth years sooner.

After analyzing their CCC, their CCC was 53 days.This means from the day you invest into buying goods to sell, new cash is not received on average up to 53 days.

No wonder they didn’t have excess cash to re-invest in the right areas to grow much faster.

We put a plan in place to offer 2.75% early payment discount to customers and also decreased lead times from 6 weeks to 4 weeks.

As a result, CCC was reduced from 53 to 39 days.

This had an impact on building excess cash flow to re-invest in other areas by 23.2% in 5 months.

Here’s what you need to know.

Optimizing your CCC is a powerful first step, but sometimes you need an extra boost. Let’s explore smart ways to access external funding to fuel your business goals.

Your CCC is a powerful first step. To accelerate growth even further, let’s explore smart ways to access external funding…”

Accessing Bank Funding: Your Roadmap.

While you may understand the basics of business loans, securing funding takes more than just a good idea. Let’s look at what banks want and debunk some common fears that hold small businesses back.

1. Preparation is Key

Banks assess your creditworthiness, financial health, and how you’ll use the funds. Be ready with:

  • Updated business plan outlining growth goals.
  • Financial statements demonstrating profitability and cash flow.
  • Clean credit history (personal and business).

2. Mitigating Risk

All loans carry risk. Mitigate yours by:

  • Understanding terms and fees fully before signing.
  • Borrowing only what you can comfortably repay.
  • Having a contingency plan if revenue projections fall short.

3. Busting Common Fears

  • Fear: “I’ll be rejected.” Preparation boosts your chances. Seek guidance from resources like [insert relevant resource for UK small businesses].
  • Fear: “My business is too small.” Raj, owner of a custom woodworking shop, felt intimidated by the bank application process. However, a government-backed loan scheme specifically for small businesses helped him purchase new equipment, allowing him to take on larger, more profitable projects.

Even with a loan, strong profitability fuels long-term cash flow creation. Let’s explore ways to boost your bottom line…

Boost Your Bottom Line, Boost Your Cash Flow

Profit and cash flow aren’t interchangeable. Let’s focus on actionable ways to increase your profit, which directly fuels your cash reserves for growth.

Focus: Revenue and Expenses

1. Pricing Power:

  • The importance of strategic pricing vs. simply aiming for the lowest price.
  • Techniques like value-based pricing.
  • When and how to implement small price increases without alienating customers.

2. Controlling Costs Without Stifling Growth:

  • Smart negotiation with suppliers for better rates.
  • Reviewing recurring expenses and identifying areas for savings.
  • Streamlining processes to improve efficiency.

Sarah, owner of a handmade jewelry business, saw increasing costs eating into her margins.

Realizing she’d undervalued her work, she researched similar products and repositioned her items with a focus on their unique craftsmanship.

This strategic price increase boosted profits, giving her the cash flow to invest in marketing and scale her business.

While profit is vital, sometimes outside capital is the best way to reach your next level. Let’s explore attracting investment…

Tap into Alternative Funding Sources for Growth

When banks aren’t the right fit, angel investors and crowdfunding platforms offer alternative ways to raise the capital you need. Let’s demystify the process.

Focus Areas

1. Understanding Each Option:

  • Angel Investors: Individuals who invest their own money in promising businesses in exchange for equity (ownership).
  • Crowdfunding: Raising small amounts from many people, typically through online platforms, often in return for rewards or perks.
  • Example: [Name of a UK business], successfully raised funds through [angel investment or crowdfunding] to expand their product line.

2. Preparation is Key:

  • Investors want: Strong business plans, healthy financials, and compelling presentations demonstrating growth potential.
  • Tailor Your Pitch: Emphasize the problem you solve and how the funding will fuel expansion.

3. Finding the Right Fit:

  • Resources: Explore [list 2-3 relevant UK resources like angel investment networks or reputable crowdfunding platforms].
  • Industry Focus: Seek investors and platforms specializing in your niche for better alignment.

Even with outside investment, maintaining strong internal cash flow is crucial. Let’s look at some outside-the-box ways to generate additional funds…

Get Creative: Unlocking Hidden Cash Flow Sources

Sometimes, the most overlooked cash flow opportunities are right under your nose. Let’s explore some less conventional strategies.

Practical Strategies

1. Unused Assets:

  • Rent or Lease: Do you have extra space, equipment, or vehicles that could be rented out?
  • License Intellectual Property: Could your patents, trademarks, or creative work generate licensing revenue?

2. Partnerships and Collaborations:

  • Strategic Alliances: Could partnering with another business create new revenue streams?
  • Shared Resources: Are there ways to reduce expenses by sharing resources (office space, equipment, etc.) with a complementary business?

3. Government Support:

  • Grants and Tax Credits: Research any grants or tax incentives applicable to your business and industry. (Ensure these are up-to-date for the UK).

A small manufacturing company had excess warehouse space. By partnering with a local fulfillment company, they rented out the space, generating a steady stream of additional revenue.

Remember, cash flow creation is an ongoing journey. Let’s wrap up with some final tips to help you stay on track.

Your next step- Ready to Take Control?

Cash flow freedom is within reach.

You’ve learned the powerful strategies for unlocking cash flow creation.

Don’t get overwhelmed!

Start by analyzing your Cash Conversion Cycle.

Need help? Here’s my free cash flow calculator tool for you.

Ready to take the next step?

Let’s discuss how I can help you create a customized cash flow strategy. You can book a call by clicking here.

Additional Resources:

Cash Flow Constraints– If you are experiencing cash flow challenges but you are not sure, which one is the most relevant to your specific situation, I have provided the most common ones I have come across working with clients who are doing annual revenue of £40k to £53.8m across different sectors.
Cash Flow System– If you want to go from cash flow constraints to building cash flow surplus, then you need a system to help you do just that. You can adapt my 8 C’s cash flow system.

I encourage you to  looking for a specific area such as :

So that you get comprehensive idea of building your own cash flow optimisation eco system.

Also, check out other areas to build cash flow surplus, below.

Gain crystal-clear insight into your cash flow. Click to learn how seeing the full financial picture can transform your decisions and drive your business forward
Take the reins of your cash flow with confidence. Click to master the strategies that put you in control of your finances, not the other way around.
Stressed by cash flow surprises? Click here for savvy tips to secure stability in your finances, and steer clear of the stress