As a leader in business there is a lot you need to do to manage it. This post is not going to tell you about all the operational and people issues you need to consider it is purely to describe the financial levers you have at your disposal. Each of them will lead to operational and people impacts.
So, in my view there are five. Most businesses only focus on the first two:
- Accounts Receivable (Trade Debtors)
- Accounts Payable (Trade Creditors)
If you want some background on how these items are related to your overall financial performance then learn about them on the Income Statement and the Balance Sheet.
Revenue – Increase it. If you can grow revenue at a faster rate than your expenses then you will improve the state of your business.
Expenses – Decrease Them. If you can reduce your expenses (in a sustainable way) and maintain or grow your revenue then you will improve the state of your business
Accounts Receivable – Collect Faster. If you can get your customers to pay you faster, across the board, from what they currently are then you will move cash from sitting in your customers account in to your account.
Accounts Payable – Pay Slower. Be careful about paying your customers too soon. Negotiate longer terms and pay on the last day. Don’t pay late. The longer your terms the longer the cash you have stays in your account. Remember that this is a really sensitive one! If you are too slow and do it to the detriment of your suppliers don’t expect them to do any favours. Your goal should be to try and match the terms that your customers are paying you on (Accounts Receivable) with the terms you are paying your customers on. If you can do this then you will reduce the working capital you need to run your business.
Inventory – Reduce It. Inventory sitting on your books is cash in someone else’s bank account. Look for ways to reduce the time inventory sits on your books – be careful as if you cut it too skinny then you can’t serve your customers. But fundamentally, if you hold too much inventory then this is using up your cash and preventing you from using it somewhere else to run your business.
There are definitely others, but these are the levers you need to consider. Pulling them all a the right time and in the right sequence is one of the keys of business leadership that you need to learn to master.
Bonus Two Levers:
Okay so I said there are five key business levers, but I am going to give you a bonus two extras:
Volume – Sell More Units. In a product business find a way to sell more volume. It might be at a slightly reduced price, but if you can sell more of them you can produce the core overall result of increasing revenue (see Lever #1).
Cost of Goods Sold – Reduce Them. Find a combined way to reduce the direct costs of selling your product or service. This is a variation of some of the prime levers (revenue and expense)