What does generating cash mean?
It simply means that you have got more cash coming in than going out, and therefore your bank balance increases. It not only goes up temporarily, but a truly cash generating business will keep generating cash.
So, what are the common myths as to cash generation? Here are 3 of them and our responses:
We are running out of cash because we are growingThere is no doubt about it, that growing a business does cost cash. Not only investments for the growth such as R&D, increased infrastructure, and additional capital expenditure requirements, but there is also a ‘growth cost’. This is the growth in working capital required to fund the business, and includes your stock, trade debtors and trade creditors. However, should it mean you are running out of cash?? The answer is no! If you make the right changes to your business, for example profitability, business model, cash drivers etc., then we firmly believe your business can be growing and be generating cash – that is why we call it ‘smart’ business growth.
We are comfortably within overdraft limits, and we also use import finance, so our bank balance is generally OKThe answer to this, is yes and no! Absolutely, it is imperative that you keep liquid in business, and having free cashflow and reserves is needed for this. However, a focus for our clients is debt reduction and minimising reliance on bank funding. Again, it comes back to making the right changes in your business, so that your business can truly generate cash and reduce bank facilities at the same time.
I have got some surplus cash privately, or I can increase my personal mortgage on my house, and introduce that extra cash into the businessAgain, if the business is in a tight spot for cashflow, and facing a cash shortage crisis, then every option must be looked at to get cash inflows into the business. However, this is very much only treating the symptoms! This is not a preferred route to go unless you really must and will not fix the problem long-term. If the business is running out of cash, there are elements in the fundamentals of the business that needs arresting and changing, and that’s where expert business and financial advice is needed to identify the issues and advise actions to improve.
What does a good cash generating business look like?
- Healthy growth in sales, but generating surplus cash at the same time
- Reducing reliance on bank funding, both in business and personally (the ultimate goal is to have none)
- Maximising all opportunities, whether it be business or tax saving opportunities, because there is surplus cash to do so
- Able to provide funds for other needs, such as charitable causes and family requirements
It is absolutely possible to truly generate cash in your business. It's a question of knowing what changes to make that will have the greatest impact. That is where expert business and financial expertise comes in. Here at Oldfield, we are passionate about increasing profitability, releasing cash and driving equity up. Contact us today to discuss your situation - we'd love to talk to you!
Look out for more articles on Cash Generation - coming soon!