Blog & Company News

Jun 28, 2011

How to Improve Cash Flow

[caption id="attachment_393" align="alignright" width="378" caption="Improve cash flow"][/caption] Once upon a time, you had a plan for growing your small business. You put it down on paper and everything looked orderly in black and white. It all came down to a simple formula: great product leads to strong demand, which leads to sales, which lead to cash in the bank. But real life is messier. In real life, you need to lay out cash for materials and inventory. Some of that inventory then sits in a warehouse, where it costs you money. In real life, some clients are slow to pay. And in real life, banks charge fees when you use credit cards for necessary purchases of materials and inventory. All those problems—the money tied up in inventory, the customers who pay you back slowly, and the costs associated with paying bills—affect cash flow. Clearly, improving your cash flow will improve your business. How do you do that? Here are five pointers: 1. Don’t go for quick fixes. Your understanding of cash flow needs to focus on the whole problem—the surges and sputters of everyday inflow and outflow. If you don’t have one already, write out a projection of your cash-flow needs, month by month, covering two years. Don’t stop there. Do year-to-year projections that cover at least three, and better yet, five years. If you’re just starting in business, you can find various cash flow calculators on the internet.1 Documenting your cash-flow needs on a spreadsheet or in a chart means you don’t have to go on instinct or gut feelings to decide, for instance, whether to increase your spending on materials right now. When you put in money up front, you need to be able to forecast when it will pay back. Lay your projections out week by week so you can see revenue expectations and needs. Then, you’ll be able to look at collecting receivables faster. 2. Pay slowly, or take a discount. It’s not surprising to learn that chief financial officers at some of the best-performing companies stretch out payables 10 days longer than is typical (this is from a 2010 study by REL,2 a cash flow-consultancy). Of course, the survey looked at the 1,000 largest publicly traded companies, and your business is probably smaller. If you do slow your payments, make sure you’re not incurring any penalties. On the other hand, if you are paying quickly, you should be rewarded. Standard trade credit is 2 percent if you pay in 10 days. Is your accounts-payable department proactive in pursuing the discount? It’s worth noting that paying on time (usually, net 30) will help you establish a relationship with a vendor that might lead to better pricing in the future. Dependability is worth something when you negotiate. 3. Analyze your customers. Look at how long it takes to get paid by each of your regular customers. You may find no correlation between which customers your salespeople love and which ones have good paying patterns. If you are paying vendors in 30 days and your biggest customers are taking much longer, then you have a serious lag in cash flow. Get serious about communicating with late payers. Start to gently remind them at 31 days that invoices are due. Doing so should speed up payment, and even if that happens bit by bit, it will improve your financial position. Here’s the bonus: When your accounts-receivable team members pick up the phone and communicate with late payers, they will probably find out about disputes and difficulties on certain orders. What you’ll have then is a service opportunity. 4. Offer a credit-card-payment option. Do you invoice every one of your customers and wait for payment? That’s standard in many industries, but there is no reason to follow that older method. Offer customers the chance to pay at time of purchase via credit card. That will speed cash into your system, and the customer who pays with a credit card will still get the benefit of several weeks’ float. 5. Keep a keen eye on lean inventory. If too much of a product is sitting on your shelves, it isn’t bringing in cash. Variable demand (whether seasonal, geographic, or related to price promotions) is something you can study and forecast. Depending on your product’s characteristics, you can and should manage your supply chain to keep your inventory lean. That, in turn, will benefit your cash-flow position. For more information, visit: 1. Cash Flow Calculator 2. REL