How to achieve cashflow freedom

Attaining cashflow freedom is a significant financial milestone that empowers both personal and business pursuits.

It signifies the ability to fund desired activities and investments without financial constraints. Whether it involves acquiring assets, rewarding your team, or enjoying quality time with your family, cashflow freedom enables you to live the life you aspire to lead.

Understanding the Business Cycle

The Business 101 Cycle demonstrates the relationship between investments, profits, cashflow, and drawings for business owners.

Your initial investments and financial support facilitate asset acquisition, which in turn lays the foundation for generating profits. Sustained growth in sales and margins contributes to increased profits, while vigilance against overhead expenses and rework prevents profit erosion.

This generated profit becomes the lifeblood of your cashflow, subject to various factors such as prompt customer payments, efficient stock turnover, supplier payment timelines, and tax obligations. The residual cash remaining is the resource you can utilise for personal withdrawals or reinvestment in the business, thereby generating additional income.

The link between your business and personal cashflow

For business owners, personal withdrawals are contingent upon the available cash within the business. During economic challenges, a judicious approach to personal withdrawals becomes crucial, enhancing the business’s resilience. The more money you can leave in the business, the more resilient your business will be.

On the flip side, if you have plans to upgrade your house or car, or take a longer family holiday, you may need to revise your business’s forecast and implement strategies to increase cashflow so you can draw more from your business.

A personal budget gives you better visibility and control of your personal finances.

Creating a personal budget offers far-reaching advantages beyond financial restraint. It provides a comprehensive overview of available funds, facilitates informed spending decisions, and helps you achieve your financial goals. By fully understanding your personal financial situation, you’ll be able to revise your personal budget to determine the lowest amount you can afford to draw from the business and how much cash you can reinvest in the business.

Business owners often wonder why their bank balance doesn’t always reflect their profit.

Profit is the amount left over when all of the business’s expenses and tax have been paid. Profit doesn’t go straight to your bank account – it’s used to buy new materials or equipment required for reinvestment. Only the amount left over can be taken home by the owners. The stronger your business’s cashflow, the stronger your personal cashflow can be.

The Cash Conversion Cycle

The Cash Conversion Cycle shows the number of days your cash is tied up in the sales process. Usually you buy your stock from your supplier and pay for it before you sell it to your customers. Or, you start a job and have to pay wages and costs before invoicing for the job. Your cash is tied up until your receive payment from your customers. The goal is to have the shortest cash conversion cycle possible to increase the cash available in your business. The two areas to focus on to improve your Cash Conversion Cycle are your Inventory/Work in Progress (WIP) Days and Debtor Days.

Cash Conversion Cycle = Inventory/WIP Days + Debtor Days – Payable Days

In the example above, you’d need enough cash to cover the 75 days from paying for stock until receiving payment.

Inventory/WIP Days = Inventory/WIP ÷ Cost of Goods Sold

This is the number of days it takes to sell stock after receiving it from your supplier, or the number of days it takes to finish work for clients. It’s important that you measure your stock and identify obsolete stock that doesn’t sell quickly. For work in progress, ensure you accurately record the time it takes, implement processes to avoid rework, and consider sending interim invoices for longer projects.

Debtor Days = Debtors ÷ Sales

This is the number of days it takes customers to pay you after receiving their goods or service. Ensure you have robust Terms of Trade and that payment terms are 7 days after invoicing – not payment by the 20th of the month. Review your follow up process and contact customers as soon as invoices become overdue.

Cashflow management strategies

To ensure you’re managing your cashflow effectively, consider implementing the following strategies:

  1. Streamlined debtors process with strict adherence to payment terms.
  2. Qualify customers before offering credit.
  3. Create a stock control system and monitor sales trends.
  4. Negotiate better terms with suppliers.
  5. Utilise and adhere to budgets and forecasts.
  6. Determine a monthly personal withdrawal threshold.

It’s important to set improvement goals around the strategies you intend to implement and measure success.

Determine the Key Performance Indicators (KPIs) relevant to the goal and set attainable targets. Break each goal into manageable actions with achievable (but motivating) timeframes. Utilise a dashboard or app to monitor your results to ensure you’re on track.

As with all change, there will be some setbacks. The more visibility you have over your numbers and KPIs, the quicker you can respond to these and recover. Small improvements can quickly add up to a substantial increase in cashflow. Celebrate your success when you achieve your goals. Then, start working on the next area of improvement.

How we can support you

We’re committed to empowering you to improve your cashflow. The personal impact can be huge. We’ll also look at small changes you can make to increase sales and improve your profit. No matter what level of support you need – from catching annually to do your forecast to meeting monthly for accountability to achieve your goals – we’re here to help. By achieving cashflow freedom, you’ll reduce your stress levels and free up time to spend doing what you enjoy most.

Cashflow management is a part of our Virtual CFO service that can help you identify and fix the underlying causes of poor cashflow in addition to preparing a Cashflow Forecast for your business. With specialised skills and extensive experience, our KMT advisers will work with you to set goals for improvement and implement strategies to maximise your business cashflow.

Contact us today to learn how to improve your cashflow management!

About our adviserChrisanthe Lekatis is renowned for her expertise in management accounting, virtual CFO services, and top-tier business advice. Chrisanthe’s passion lies in process improvement, as she combines her analytical prowess with adaptability to explore avenues for business sustainability. By deeply understanding her clients’ businesses and goals, Chrisanthe empowers management with tailored strategies for success, streamlining processes to achieve efficient and cost-effective outcomes. Please do not hesitate to reach out if you need assistance.

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or professional advice from a qualified accountant or financial adviser at KMT Partners.