Investors want to see cash efficiency: what does it actually mean
Cash efficiency involves the careful handling of cash as an asset in your business. Poor management of cash can lead to large losses for a company, and it greatly decreases the efficiency and profit of the business.
If a company is plagued by poor cash management, investors will be far less likely to put their money into the business. A lack of cash efficiency due to mistakes when handling cash, theft, or fraud will negatively affect the success of the business.
Investors want to turn a profit, and their goal is to make the profit as high as possible. This goal should align with that of the company, although the company is the one responsible for increasing profits and efficiency, so investors can be assured that their investment is wise.
Cash flow includes financing activities, investing activities, and operating activities. These are all related to the financial statements of a company and can be improved with a variety of tactics that will greatly improve the success of the business.
Keep the headcount low
Manual cash handling is not a very efficient method of managing cash, so reducing the number of people who come into contact with a company’s cash can increase efficiency.
Sorting, balancing registers, and counting cash require employee time and money and do not increase the profits of the business. Additionally, with manual cash counting, there can be errors made that can decrease efficiency. While some industries or businesses require manual handling, reducing the number of people that participate in cash handling can greatly increase cash efficiency.
Investing in automated cash management can greatly improve the efficiency of cash management. Technology is capable of handling the sorting, validation, counting, and reconciliation of floats and cash, which can increase efficiency as well as decrease the cost of cash management.
Employees can prioritize working on the business while the cash counting process itself will be more secure, accurate, and efficient. Automation requires an immediate investment, but it will decrease costs in the long run, which is a major plus that will be well worth it for your business.
Don’t invest too much in sales and marketing you don’t really need yet
While investments in sales and marketing are important, it is also important to only invest what the company can afford at the current time. Being smart with how money is spent will increase cash efficiency, and it can be easy to over-invest in the future instead of paying attention to the present.
Putting money into sales can help increase sales, but putting too much capital into sales can have the opposite effect, and you could be losing profit. It is important not to focus too much on future quarters and to prioritize investments that will benefit the current financial quarter.
At the same time, marketing is also a valuable asset that can increase how many customers come to your business, but at the same time, it is important not to overdo it. Make sure to spend a wise amount on marketing so that your profit increases but you do not end up in the hole because of marketing fees.
Focus on the right things at the current (fundraising) stage
Prioritizing the most important business elements is important to turning a good profit. Running a business is expensive, and the costs rise when there is no prioritization during the funding stages.
Investors want to see their money going towards something real and concrete, so focusing on investments that will increase profits in the present is extremely important. Keeping investors happy is important to the success of the company, and making sure that you are prioritizing the right things will accomplish this.
Do a cash flow projection
At a board meeting, make sure to go over the cash flow so that investors understand exactly how their money is being used. Understanding cash flow projections will help the company understand how much money is needed to run the business as well as search for alternative ways to fund operational costs such as notes, venture debt, revolvers, or lines of credit.
It is important to maximize the efficiency of the cash that the business already possesses. Improving margins as well as improving cash efficiency are both extremely attractive to investors, as the more efficient a company is, the more money each person involved will make — both members of the business and those investing in the business.
Cash flow projections can help keep investors happy, and it is very important to understand the future of your business so you know where to invest money and resources. It is a great idea to do projections yearly or even quarterly to see how the business or industry is changing.
Monitor employee performance
Creating statistical reports that highlight key data can help prevent revenue problems related to a lack of cash efficiency. Creating daily, weekly, and monthly reports regarding financial data for your employees can help understand and monitor cash flow.
The statistical reports should include the net collection rate, which will show how effective billing is in the company. The net collection rate is the total collections divided by the total charges minus the adjustments. When this ratio decreases, it could be due to write-offs per contract or it could mean that instead of appealing payment denials, employees are writing them off.
If employees are writing things off in the billing stage that should not count as write-offs, the company is losing money. Creating reports ensures that employees follow the policies of the company, and therefore profits will be maximized.
Another statistic that should be included in reports is the gross collection rate, which should measure discounts or adjustments in the payments of those paying with a third-party service. The gross collection rate is equal to the total collections divided by the total charges. If these percentages are not satisfactory, contracts can be adjusted to maximize cash flow.
Finally, reports should include the number of days in accounts receivable, which is the accounts receivable divided by the average daily charges. This should be included in monthly reports, and if the number of days in accounts increases, it should be addressed quickly to maximize cash efficiency.
Send invoices out right away
If you send invoices out right away, you will be paid back quickly, which improves cash flow and efficiency for your business. Invoices should be easy to understand and read for both employees and customers.
It is important to include instructions about how to pay, what types of payments will be accepted, and if there are any late fees for late payments. Having clear invoices will maximize the efficiency of payments due to the ease of payment for everyone involved. Another bonus is that customers will appreciate promptness and efficiency.
Cash management training
Having a well-trained workforce can ensure the success of any company or industry. Having cash management training can ensure that there are fewer mistakes made when handling cash as well as a lower turnover rate.
When company procedure and policy changes, employees should be notified immediately so that they are always in the loop and will not make mistakes or act differently than the company requires. Having opportunities for cash management training and other means of professional development will improve the work of the employees and therefore improve the efficiency of the business.
Training in cash management is not an overly long process, and it is a positive addition to your business. Making sure that employees are the best that they can be will ensure that your business is the best that it can be as well.
Cash management training can be spread out over several months or it can be done in several sessions. Ensuring that all customers who handle cash are properly trained will decrease errors and increase profits at the same time.