How to master cash flow in your business

7 Mar 2018

Image: Ollyy/Shutterstock

Having trouble managing your cash flow? Georgina Kearney of Sustained Growth Consulting Services has some business tips to help ensure funds don’t run dry.

Many businesses don’t understand the relationship between profitability and cash flow. It is an easy assumption to make that if you have a profitable business model and you increase sales, that your cash will increase. Unfortunately, for a variety of reasons, this is not necessarily the case.

When cash flow is tight in a company, it can create a stressful environment, with energy being focused on firefighting rather than on creativity and growth. Ultimately, failure to manage cash flow can lead to the business becoming bankrupt.

Future Human

In this article, I’m going to look at two key areas:

  1. The factors that affect your cash flow
  2. What you need to do to effectively manage your cash flow

Factors that affect cash flow

Cash conversion

The working capital cycle is also referred to as the cash conversion cycle, which is:

  • Debtor days (average number of days to collect cash from customers)
  • Inventory days (average number of days you hold stock before it is sold)
  • Creditor days (average number of days to pay your suppliers)

In my view, every entrepreneur should have to consider their cash conversion cycle as well as their profitability model, because it significantly affects the company’s ability to fund growth organically. I’m going to explain this with some examples below.

Negative working capital happens if your cash conversion cycle is less than zero.

Amazon has negative working capital; it gets paid upfront by customers, it manages stock very efficiently and it has favourable terms negotiated with its suppliers. In 2017, its cash conversion cycle was cited at negative 30 days. So, while its profits are actually quite low, its cash flow from operations is very strong, allowing it to fund rapid innovation and expansion without borrowing or issuing stock.

Let’s take an example of another business, which has suppliers that insist on full payment of all outstanding invoices for the month by the middle of the following month – an average of 30 days’ credit, whereas its key customers take between 45 and 60 days’ credit.

As it doesn’t expect to hold stock, its cash conversion cycle would be:

Average debtor days of 53 – average creditor days of 30 = +23 days

This could leave this company in a situation where cash flow is a constant issue and, if a very large order came in, the cash implications might need to be carefully considered.


Revenue is affected by the following factors:

  • Sales volume: Your business should have sales targets for the coming year, and a plan for the sales and marketing activity required to achieve those targets
  • Sales price: It is important to determine that your prices are set at an appropriate level. Pricing can be done in many ways, and is influenced by your brand position and the niche market you operate in
  • Quality: A good-quality management system can be an investment as the cost of rework or poor service delivery can be high in terms of loss of repeat business or brand damage

Every expenditure should be justified. Suppliers should be carefully chosen based on quality and price, and regular negotiations on price and credit terms should be undertaken with key suppliers.

Regarding salaries, it can be a false economy to pay staff too little. The cost of employee churn is very high and key employees should be at least paid market rate, if not a little more. Engaged employees are more likely to stay long-term, be productive and be good brand ambassadors, so it is worth considering that employee engagement can have a direct impact on cash flow.

Capital expenditure

Any large capital expenditure has a significant impact on cash flow and so, it is important that all proposed expenditure has a cost-benefit analysis done to ensure it will add value to the business in the long term, and see whether the business has sufficient cash to fund it in the short term.


Georgina Kearney. Image: Sustained Growth Consulting Services

What you need to do to manage your cash flow

Cash flow forecasting

As a business owner, each month you should see your management accounts that show your revenue and profit, and you should also see a cash flow forecast for at least the next six months. If you don’t currently have a template, I can recommend the small business cash flow planner on the AIB website. You can also take its format and create your own Excel spreadsheet, tailored to your business needs.

Contingency planning

Even if you don’t anticipate a cash flow problem, it is always good to have a backup plan. An agreed overdraft facility with your bank is the most common.

Setting KPIs

Key performance indicators (KPIs) should be set for the areas that influence cash flow. There should be monthly targets, and a red flag should be raised if these are not being met. There should be a clear plan as to how they are to be achieved.

Examples include:

  • The revenue target for the month is €220,000. Only €205,000 is achieved in the month. A red flag is raised. Management review sales activity versus the sales plan and see that lead generation efforts fell short of targets. A review is carried out into why lead generation did not happen as originally intended
  • The target cash conversion cycle is 12 days but it has risen to 15 days. An investigation is carried out and it turns out that credit terms were offered to a new customer without any background checks being carried out, and that customer is now defaulting on payment
Creating a cash-flow-conscious culture

Every employee should understand and be held accountable for how they affect cash flow. Examples include:

  • Have senior management demonstrate that all costs incurred are opportunities for creating additional value, eg have a proposal form for costs – such as attending an international conference – that evaluates the cost or benefit of the opportunity in qualitative and quantitative terms
  • Ensure that you have procurement policies in place that require at least three quotes to be sought for any expenditure over a certain amount
  • Link staff compensation to either cost reduction or sales generation
  • Pay commission to sales reps when the customer pays, not when the sale is made
  • Make sure that every employee understands that they are a brand ambassador and have the ability to influence sales
  • Have important KPIs such as debtor days displayed in the finance department, and have documented procedures as to how the target figure is to be achieved

By Georgina Kearney

Georgina Kearney is the founder of Sustained Growth Consulting Services, which provides accounting services to start-ups and SMEs. With more than two decades spent working in this sector, she has amassed a wealth of knowledge in entrepreneurship, management and business planning. For more specific suggestions to help you build a cash flow strategy, click here.