Home > Economy, Business & Finance, Process Optimization > Cash Flow Velocity : Optimize It!

Cash Flow Velocity : Optimize It!

In business, cash is king. How often you receive it from your customers and how quickly it leaves your door once you have it is a critical factor in the success of any business. Cash flow velocity, or the speed at which your get paid from your customers, has a great impact on the health of a business.

Positive Cash Flow is the life blood of any business.

The difference between what you take in on a product or service and what the direct costs of providing that product or service is called your Net Contribution Margin (NCM). For example, let’s say you sell a product for $100 and the direct costs associated with providing that product is $50; your NCM is 100%.

Now deduct expenses for staff salaries, rent, mortgages, loans, leases, marketing expenses, insurance, etc. and any other monthly costs. Take that number away from your NCM and you are left with your Operating Margins or Earnings.

On top of this, business owners must factor in how quickly they get paid from customers. The longer the delay in payments from them, the lower your bottom line is because you are in essence financing your customers’ payables.

If a customer takes 60-90 days to pay an invoice or monthly statement, you, as a business owner, must consider those days without being paid as a reduction in your Operating Margins. Each day you help finance your customer’s payables equates to a negative % and $ to your bottom line profits.

Here are a few things to consider in improving the cash flow velocity in your business:

  • Could you eliminate or reduce inventory?
  • Can you generate cash before you have to incur costs?
  • Can you speed up your customers ordering cycles? How?
  • How can you get paid more frequently over the lifetime of a contract?
  • Can you charge for what you offer in a different way?
  • Can you incur costs and make payments in a different way?
  • Can you charge customers for what they might value rather than for what you traditionally provide?
  • What technology and automation can speed up the payment cycle?
  • Do you have the best terms with your vendors and suppliers?
  • Are your staff levels balanced with your work load?

The ways in which you can improve cash flow velocity will vary and be unique by business and industry. Business that carry heavy inventory will approach the issue differently than a pure service business. As will B2B and B2C.

What are some others ways in which the cash flow velocity in your business can be improved?

Don Sedy 2010

  1. July 24, 2010 at 2:57 pm

    We offer a pre payment option. This reduces late or faulty payments. We are willing to give a discount for this pre payment since it helps us reduce clutter at the front desk.
    I run a Wellness Center located in Westchester NY

    • July 24, 2010 at 10:29 pm

      Thats a great way too Seth. Thanks for the feedback!

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