How to Improve Your Company's Cash Flow
Collect it quickly – Spend it slowly
Many a business has experienced great sales, good customer relations, even a growing market – but they've closed because of a lack of working cash flow.
In business, cash is king.
Just how important it is to improve your cash flow depends on your situation. It may be more critical in startup or growing businesses, but all companies can benefit by improving the amount of available funds.
The cash flow equation, of course, has two sides. The bottom line on cash flow is the same as always: Collect it quickly and spend it slowly.
Collections
Bill early and often
How often do you invoice your customers?
They can't pay you until you bill them, so bill them quickly once your product or service is delivered.
If you deliver ongoing services, establish a billing schedule. Depending on sales volume and number of transactions per customer, you may want to bill weekly or semi-monthly.
Once a month is too seldom in most cases. Just by increasing the frequency of your billing, your cash flow will improve.
Specify due dates
Do your invoices indicate when they are due? Many companies bill with terms like “net 30.”
A better due date would be November 10 or June 12. Specific dates help your customers know exactly when you expect to be paid.
Many computerized accounts payable systems ask for a due date. If you've listed one, that's the one that will most likely be put into the system. If you haven't listed a specific due date, your customer gets to decide on one. That may not work to your advantage. Specific due dates also let you know exactly when to begin following up on accounts receivable balances.
Make those collection calls
The old adage “The squeaky wheel gets the grease” is especially true when it comes to collections.
You aren't the only company trying to manage cash flow. Your customers may be managing their cash flow at your expense. If they have to choose which vendor to pay, you want to be at the top of the list. If they know you'll call to ask about the payment, they're more likely to schedule you earlier.
If they haven't paid on time, let them know you're paying attention and that your due dates really mean something. Your collection efforts don't have to be nasty or unpleasant. Professional collections will improve your cash flow.
Offer payment options
Consider accepting credit cards if your customers are slow payers. There are costs associated, but speeding up your collections may offset those costs. Banks, merchant services companies and credit card companies themselves offer packages to encourage you to accept credit cards. Rates can vary widely. Shop around so that you get the best deal for your situation and usage levels.
Take advantage of technology
Through today's technology, you can accept checks over the Internet, process checks electronically without ever visiting your bank, or avoid the check issue altogether by setting up customers to pay directly into your bank account. All of these options speed up your access to the cash.
Consider factoring
Factoring companies perform several functions that could help improve your cash flow. They can serve as your credit department and handle credit acceptance, credit limits, invoicing and more. They also buy your accounts receivable for cash and charge you a percentage. While this option will cost you money, it could be a solution in some cases. Many banks offer factoring services, so you may want to start with your bank. Move carefully because the percentage can be steep.
Payments
Negotiate vendor terms
You want shorter terms for your customers. But as a customer, you want the longest terms possible.
Talk to your vendors. See if you can negotiate longer terms or discounts for quicker payment. If you are a significant customer, you may have leverage here. Although most suppliers have terms of 30 days, you may want to ask for terms of 60 days or 90 days.
Perhaps you could persuade the vendor to bill you monthly instead of weekly (the exact opposite of what you are advised to do for your customers). If they hold your purchases in their system longer, it will keep them out of yours and increase the amount of time your cash stays in your system.
Control your inventory
In growing businesses, it's easy for inventory to get out of control and devour the company's cash. Using turnover ratios will help you determine if your inventory is at the correct level. If you need to reduce the level of your inventory, you might want to begin by working with your vendors. They may be willing to store a certain amount of inventory, which moves the carrying cost to the vendor.
Pay with a credit card
If you have a credit card with no annual fee and you're able to pay off the balance every month, this option won't cost you anything. Simply pay your vendor on the due date with your credit card.
The credit card company will bill you in one to three weeks, giving you access to that cash in the meantime. Be careful, though. If you let this get out of hand and don't pay your balance each month, this option could cost you more money.
Check into cash-back offers on credit cards as well. If the credit card company provides a cash-back option and still has no annual fee, it could mean money in the bank. Read the terms and conditions carefully. Don't get caught by rules and nuances that will cost you.
Renegotiate with your bank
If you feel your bank's loan payment is choking your business, ask the bank to restructure your loan. Often in an expanding business, repayment of the principal is too rapid.
Remember, if you don't let the bank know, it won't have the opportunity to help. If the reason for the restructuring is reasonable, most banks are willing to accommodate your request.
How you benefit from our services
Highly trained and experienced staff – Our professionals have years of experience dealing with financial planning and management consulting for all aspects of running a business. We can assist you to institute a better system of collections from your customers as well as help you to restructure your own payments.
Financial knowledge – As financial professionals, we understand how to analyze the bottom line of a business and the techniques necessary for the evaluation of sales and marketing, production costs, operations and financial management. We can show you, through use of standard financial ratios, if your inventory turnover, growth and profitability figures are strong.
National access to professionals – Our firm takes pride in its affiliation with CPAmerica International, a global network of accounting and consulting firms. This affiliation allows us to make available to you the financial knowledge and resources of thousands of CPAs across the country and around the world.
For more information, please call us to make an appointment.
© May 2007 CPAmerica International
The technical information in this brochure is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation.