When you’re pumping out sales and everything seems to be firing on all cylinders operationally, it’s easy to assume everything is humming right along financially. But many companies who are growing in sales still wind up in a pinch because they tend to glance over the fact that sales is not the only area of your business that’s growing. You will have more inventory to manage, more customers, increased transaction costs, more employees, increased compliance requirements, etc. and all of which will increase overall costs. Eventually you will break through that “spend money to make money” bubble, but until then you have to focus on factors beyond operations, like how to improve cash flow and working capital, or you might get into big trouble very quickly.
A major source of working capital, and where many companies struggle, is accounts receivable. This is especially true of growing companies because more customers means more invoices to manage. When you had only a handful of customers, tracking due dates and staying in touch with customers may not have been very hard, but when you have more invoices things get more complex and invoices can start to slip through the cracks resulting in bad debt write-offs and late payments that will slow down your cash flow and future growth. When it comes to the question of how to improve cash flow in a business, below are 5 strategies to consider for ensuring successful growth, not only from a sales perspective, but from a financial one as well.
RUN CREDIT CHECKS ON NEW AND CURRENT CUSTOMERS
Every customer is different so you should not (a) offer credit to every customer (b) give the same credit limit to every customer, or (c) extend the same credit terms to every customer. Doing your due diligence before making these decisions is critical to protecting yourself from taking on bad-debt. Every company should use a credit application to gather information to evaluate a customer’s credit worthiness on an ongoing basis, not just on their first purchase. Things change and a customer who was once in a good position may not be after a few years have passed (or vice versa). Any customer who comes to you requesting a credit limit or credit terms adjustment should be required to fill out a new credit application.
BUILD A MORE ACCURATE A/R FORECAST
Cash forecasting is an essential, but trying to estimate what will happen on the A/R side of the equation is much more complicated than on the A/P side. Both are challenging, but with your payables you know what is due and when you plan to spend that money. With A/R you know when payments are due from your customers, but you cannot say if they will pay on time, pay early, or pay late. Many companies work off an average DSO so forecast accounts receivable, but it is possible to get much more accurate by using what you know about customer payment histories and broken promise patterns. The tricky part comes in identifying and tracking those patterns over time if you are using spreadsheets, ERP, or aging reports to manage this information.
By using an accounts receivable management software, you can quickly and easily forecast accounts receivable based on customer behavior, broken promises, and statistics. A summary of the projected cash receipts is then automatically provided on the dashboard from the next 7 days through the next 35 days.
DEVELOP AND ADHERE TO STRICT CREDIT POLICIES
If you do not already have one, we urge you to develop a credit policy and action plan to set the tone for what is expected of your employees when it comes to the rules, regulations and procedures around credit sales and invoice collection. The goal for a Credit Plan is to clearly define these elements so that sales and collections employees conform to documented steps and procedures designed to optimize your resources, reduce credit risk, and improve overall cash flow. Further your policy and plan will give collections employees the ability to react quickly and confidently to resolve any problems or answer any questions that arise.
CHANGE THE WAY YOU MANAGE ACCOUNTS RECEIVABLE
How are you currently managing accounts receivable? With your ERP system? Excel? CRM? Many companies take that route, but if they knew what it was costing them they would be shocked. Using manually process or rekeying data leaves room for a lot of error. This could cause chaos in the accounts receivable department, meaning collectors are spending more time trying to discover where the error is and what went wrong than they are actually collecting cash. Read this report which investigates how most SMBs are managing accounts receivable today and how that might be impacting their ability to increase the cash flow they need for continued growth.
PROVIDE AN ONLINE PAYMENT OPTION
Giving your customers an option to review their invoices and pay them online can significantly speed up payments; additionally you can keep your customers payment information more secure than with paper checks, and save yourself money. You’d be amazed at how much faster your customers pay when they don’t have to worry about writing a check, stuffing an envelope, looking up your address, writing it on the envelope (hopefully correctly), sticking a stamp on there, and walking it out to the mailbox. With online bill pay options your customers can pay instantly with just a few clicks and get back to work!
