Increase your Cash Flow as CASH IS KING! Forget this at your peril
Cash flow is the lifeblood of any business and how you manage your cash will ultimately determine the success of your business.
Here are some tips to manage your cash flow better.
One of the biggest investments that business owners make is in their receivables. Follow these tips to maximize your cash flow and squeeze more out of your existing operations.
1. RECEIVABLES, INVOICING and COLLECTION
Know your receivable cycle – If your terms are net 30 and your receivables are on average paid in 60 days, then you are financing your customers for an additional 30 days that was not part of the original deal.
Invoice Promptly: The payment cycle starts when you send out the invoice. Make sure that you are not contributing to the problem. Invoice immediately to start the clock ticking on the collection of your debt.
Partial Payments: For those companies that have longer term contracts, negotiate in advance at the time of the order for regular payments.
Give a Discount for paying before the due date: Offer an additional percentage off or maybe a fixed dollar amount off of the total invoice if they pay within 5 days of the invoice date. This strategy works well because it is a win-win situation for you and your customer.
Enforce Payment Discipline: In order to shorten your receivables period, you’ll need to have a good collection system in place. You should ask yourself:
- What are the reasons for slow payments?
- Are you identifying disputes fast enough?
- If there is a dispute does it become a priority to get resolved?
- Are the right policies and procedures in place for fast collection
Evaluate your existing customers. Who is really a key customer? Look at profitability by customer along with payment history. In all probability the old 80-20 rule applies. 80% of your profit comes from 20% of your customers. Spend time on that 20% of your customer base.
Pick the customers you want to do business with and avoid slow paying customers at the start. The best way to avoid cash-flow problems because of people not paying is to weed them out before they start owing you any money. So if someone is about to become a significant customer, do your homework. Check out credit references. Call other businesses that have had a relationship with the client
Get everyone to buy in to the Company goal of making cash flow a priority. Establish targets for everyone. Collectors should have daily or weekly targets and maybe even some sort of bonus plan for hitting targets. Salespeople should be compensated after collection is made. Customer service should be assigned deadlines for resolving an issue in timely manner.
Accept debit or credit cards. One of the simplest ways to increase cash-flow is to accept debit/credit cards. There is a small cost for this however so ensure that your pricing reflects this.
Consider accounts receivable financing/factoring. This process is more ideally suited for high margin businesses. A Factor buys a current invoice from a credit worthy customer and pays you a certain percentage immediately. When the customer pays the invoice, the factor releases the reserve, less the agreed upon fee (discount rate). With factoring, your company’s credit is not evaluated — your customer’s credit is.
Consider bartering instead of using up your cash. You could reduce the strain on your immediate cash if you need something from someone and can offer goods or services of your own in return.
2. ACCOUNTS PAYABLE
Use your business credit card. Use a credit card to pay your suppliers. Using a credit card instead of cash can gain you several additional weeks. Of course, you don’t want to charge more than you can pay off in a month or you’ll get hit with some hefty interest charges.
Evaluate your terms and renegotiate if necessary. With your suppliers, you want to see how their terms compare against others in the marketplace. You might also find out that you’re missing out on a discount if you were to pay even earlier. That might run counter to your goal of shortening that receivables-payables gap, but the money involved might be worth it.
Enforce payment discipline. This should also be part of your payables operations. A sloppy AP department might miss out on discounts and habitually paying late could hurt you the next time a contract comes up for renewal. By paying as agreed, you can build a relationship and negotiate for future discounts or payment terms better suited to your business cycle.
Analyse and trim your inventory. Evaluate your inventory by category at first then by each SKU. Determine what is your minimum or maximum is for each item based on existing stock, order lead time, projected sales for that period and safety stock. By reviewing your inventory, you will be able to tell which of your items are overstocked and are eating up your cash. Would that money be better used in your business elsewhere?
4. CAPITAL SPENDING
Consider leasing. Leasing frees up cash and your payment for the asset is spread out over time while you build the business.
Source out used or refurbished equipment and furniture. There are all kinds of alternatives to buying new and some even come with warranties. Conserving your cash is the name of the game.
5. GENERAL COMMENTS/RECOMMENDATIONS
Prepare a cash flow forecast. To see where your cash flow is likely to go in the future, try creating a monthly forecast for a 6-12 month period. Too many companies get blindsided by the normal day to day operations of their company that are predictable if they sat down and did a plan. Another advantage of the forecast is that it shows the ramifications of each of the assumptions on the overall cash flow. By increasing receivables 15 days, what does that do to my cash flow?
Consider purchase order financing. If your business provides services to other companies that require purchase orders, you can secure short term funding to finance the purchase or manufacture of specific goods that have been pre-sold by you to your credit-worthy customer.
Operational Costs. Look at reducing all operating costs by reviewing each category expense and asking yourself, is it needed? Is it needed now or can I wait? Is there a cheaper alternative?
Spend time on valuable tasks, and outsource the rest. Time is our most precious resource, and is at a premium when operating a small business. Be conscious of those activities that absorb unnecessary time and do not provide direct value to your customer, then search for opportunities to outsource.
Renegotiate your credit limit. Re-visit your bank and each of your suppliers to see if you can negotiate better terms. It is better to negotiate from a position of strength so do it early after you have built up some good credit history.
Develop successful habits. Developing a few simple cost management habits is the most effective means to free up cash for further investment into the business: obtain more than one quote; rely on your suppliers to support you as a partner in your success; seek partners who understand your current business position and who will support your growth; treat everything as negotiable.