Many companies fail not from a lack of profit, but from a lack of cash. Financial success for any business is understanding the many factors that impact cash availability and what you can do to manipulate them in your favor. All it takes is a little bit of focus. Here are five areas where you can make small adjustments for big results to improve cash flow.
High levels of outstanding accounts receivable, the money your customers have promised to pay on credit but have yet to pay, can be the kiss of death for your cash flow. Many businesses have thousands of dollars represented by paper invoices each month and not turning that paper into cash on time can be detrimental in both the long and short term. In the worst case, unpaid invoices can leave you with too little cash on hand to pay bills, salaries, suppliers, and cover other critical expenses. In other cases, you may have the cash you need to keep your head above water, but nothing on top to help you support growth strategies and business development.
In most cases, businesses struggle to get paid on time due to process inefficiencies, a lack of real-time data, and common mistakes. With a little focus and simple accounts receivable best practices in place, you’d be amazed at what your business can do to turn things around, start getting paid on time and improve accounts receivable cash flow.
When is the last time you took a look at the terms you offer your customers on credit sales? In some cases, lengthening or shortening terms can help you better forecast and manage cash flow. For example, if you have a large majority of customers who do not pay within the agreed upon terms and you subsequently suffer from inaccurate cash forecasts and slow cash flow, it may be because you’re not giving them enough time to pay.
Another thing to consider is looking at credit terms and limits on an individual customer basis. For example, you wouldn’t want to extend the same terms and limits to a new customer to one who you’ve been doing business with for years. There is no formula to use to figure out what terms to offer which customers because very business, every customer, and every situation is different. Here are 8 important considerations to keep in mind though to help you make a confident decision.
CREDIT POLICY AND PROCEDURES
A credit policy can be one of your most effective tools to keep your organization from taking on too much credit risk while also reaping the benefits of selling to customers on credit. A credit policy can serve as a guide to help your sales team sell on credit without exceeding approved customer credit limits or terms, reducing the risk of late payment and bad debt write offs. Similarly, the policy and procedure outline will provide invoice collection best practices for A/R collectors to ensure best practices for timely payment are being followed and outline procedures such as invoice escalation, sending an invoice to third party collections, etc.
They key to an effective credit policy and action plan is writing one that is neither too strict nor too generous, but a combination of the two. We’ve written this guide to help you write and enforce a well-balanced policy.
For manufacturers and other organizations that rely on inventory as a critical business component, reducing inventory carrying costs can be a huge source of cash savings. Every dollar you save in warehousing and related costs more cash on hand, less borrowing, and more profit in the long run. Inventory management is a huge topic which cannot be discussed in the length of this post, but here are a couple things to think about in terms of cash flow.
- Are you treating all of your products the same when it comes to inventory levels? For many organizations the “80-20 rule” holds true, meaning that 80% of your revenue may very well come from only 20% of your products. If that’s the case it may be in your best interest to stock more of those fast moving items, and fewer of those that don’t sell as quickly in order to reduce carrying costs on slow moving items.
- Another thing to consider is how frequently you’re ordering inventory. In some cases, you may be able to save money by ordering and storing fewer items, just ordering shipment more frequently to reduce warehousing costs.
While making sure you’re tracking how effective you are at collecting money, strategically spending money is another crucial factor to improve cash flow. What are your current terms with your suppliers? Are there any out there who would extend your terms so you could hold on to cash longer? Offer discounts for early payment? Can you consolidate shipments to save money? All of these questions are something to consider as you manage cash outflows.
In the end knowing where your business’ cash is tied up allows you to see what needs to be changed in order to get paid faster, reduce your dependence on loans, and make strategic plans to grow your business. Making some of the above adjustments is a pretty large project, like adjusting your inventory management strategy for example. But some of them can be adjusted only slightly for major returns, a fact that is especially true of accounts receivable.