Cash flow is one of the most important ingredients for success in any business, especially for small and medium-sized companies looking to grow. Many companies are unaware of their cash flow crisis until things have gotten ugly; because maybe they look profitable on paper, but they still end up filing for bankruptcy because their cash expenses creep up to overcome the cash coming in. Getting right to the point, where there’s smoke, there’s fire and the most important part of maintaining healthy cash flow is to correct the underlying issues so you can stop putting out small fires and create long-term financial stability. Below we share some of the most effective ways to improve cash flow and turn things around before it’s too late.
BE MORE CAREFUL ABOUT EXTENDING CREDIT TO CUSTOMERS
There is a lot of good that can come from offering credit terms to your customers; it establishes trust, allows them to spend more money with you, increases sales, enhances your competitive advantage, and more. On the flip side, there is also plenty of damage that can be done to your cash flow if you extend credit terms to the wrong customers. Your customers will be costing you money if they go beyond terms, slowing your cash flow, and potentially causing you to write-off bad debt. Consider tightening up your terms and always be sure to carefully investigate whether or not a customer is worthy of credit terms and be sure to apply an appropriate credit limit for each customer. Some quick advice:
- Require customers, both new and existing, to fill out credit applications any time they ask for credit terms.
- Utilize credit reports from reputable companies such as Dun & Bradstreet.
- Always check credit references.
- Create a credit and collections policy.
INCREASE SALES TO YOUR EXISTING CUSTOMER BASE
Many people have one gut reaction to cash flow problems: we need to sell more and grow! While the logic here is right, it is rarely the final answer. Acquiring new customers is expensive so you should consider focusing your attention on increasing sales to your existing customer base. Selling to any current customer will always be cheaper than generating new sales, but if you really want to drive cash flow, focus especially on those current customers. Why? If you’re selling to these customers on credit, you may still create more cash flow problems if you are unable to collect that money on time. Which brings up the next point…
FOCUS ON ACCOUNTS RECEIVABLE MANAGEMENT
Most companies do not put enough focus on managing receivables, one of the biggest contributors to your cash flow success or stress; in fact, it is usually among the biggest reasons you are having cash flow problems to begin with! As one of the most critical short-term assets in any business, reducing the amount of time that passes between invoicing and receiving payment can drastically improve your cash flow. There are many, very simple things you can do to tweak your accounts receivable management processes that will actually reduce the amount of time and effort you spend on managing invoices while helping you collect invoices faster; thereby increasing cash flow. Here are a few things to consider:
- Invoice customers as quickly as possible. Electronic invoicing is faster and less expensive.
- Send statements to customers to make them aware of current outstanding invoices.
- Communicate with customer regularly about upcoming due dates.
- Make sure the invoice includes the correct customer purchase order number, and make sure that the customer receives the invoice. These two actions alone could potentially eliminate 60% of late payments!
- Don’t rely on traditional, paper-based strategies. Use modern technology and automation that has proven itself to help companies become more efficient, reduce DSO, increase on-time payments, and reduce bad-debt write-offs.
OFFER DISCOUNTS FOR EARLY PAYMENT
This could fall under the umbrella of focusing on accounts receivable management, but this can also play a role in sales and deserved its very own bullet point. Yes, giving customers a discount for early payment might impact your profit margin, but it will work toward the greater good of increasing cash flow until you’ve gotten out of the crisis zone.
In addition to offering this opportunity to customers, ask your suppliers if they have an early payment discounts that you could take advantage of so you can cut down on the money going out while trying to increase what’s coming in. Be very careful though if you decide to pay suppliers early, make sure early payment will not leave you without cash you need in other places.
IMPROVE CASH FORECASTING BY CONSIDERING CUSTOMER BEHAVIOR
You rely on cash forecasts to help you make important decisions about paying your bills and growing your business, but it’s incredibly hard to get an accurate forecast. ERP and accounting software programs do offer templates and features to help you project and plan for cash inflow and outflow, but companies who sell on credit have an especially tough time since they must factor in late paying customers and invoice disputes, information your accounting and ERP system will not give you.
Past behavior is the best way to predict future actions and a modern accounts receivable management solution can take it one step further and help you forecast cash flow based on customer payment histories. The system will look at the historical payment pattern of your customers and give you a cash projection based on their past behavior, something a formula or template simply cannot do.