The key to maintaining a healthy balance of money flowing in and out of your business is to understand the cash cycle and take steps to improve it. A major concern for many businesses is maintaining a healthy cash flow. It is the heartbeat of business and keeping it stable requires juggling most aspects of your operation, including accounts receivables, payroll, credit and inventory.

When your business is squeezed by a tight economy — and tight credit — its ability to manage cash flow is critical. Enterprises that successfully practice good cash management generally survive and prosper during downturns; those that don’t are likely to be undone by the weight of increasing debt and the inability to pay employees and suppliers.

With that in mind, here are a dozen strategies to strengthen your company’s cash flow:

  1. Take the maximum time to pay suppliers. This amounts to an interest-free line of credit and gives you more time to use your working capital.
  2. Ask if your suppliers offer payment incentives. Some businesses offer a discount for paying early. Even if your business regularly purchases a substantial amount from another company, it is in a good position to negotiate favourable payment terms. In addition to early payment incentives, ask for special terms that accommodate your cash flow requirements. For example, negotiate to make payments after your busy season. Many suppliers are willing to offer incentives to speed up their own receivables and bolster long-term relationships with good customers.
  3. Consider offering your own customer discounts when they pay early. For example, you might provide a small discount when bills are paid within ten days of delivery. It might lower your receivables a little, but it can prod slow payers and have a positive effect on your cash flow. Before taking this step, consider whether you could borrow money at a lower cost.
  4. Examine payment terms and your billing schedule. Send an invoice with your shipments, not after delivery. Waiting until the end of the month can add as many as 30 days to your cash flow conversion period. If your business provides a service and it is appropriate, ask customers for a deposit before work begins. Remind customers of your credit terms. Check your invoices or statements to ensure there is a clear indication of when payment is due. Encourage customers to pay with fund transfers or Internet payments.
  5. Closely track and collect overdue accounts.Have your accounting department prepare fast, accurate reports on overdue payments. Monitoring accounts can uncover early warning signs. Act immediately on past-due accounts, using a collection agency if necessary. Telephone tardy customers and obtain a payment commitment by a specific date. You might give staff members financial rewards when they collect bills that have been long overdue. Stop shipments or force customers to pay at delivery when payments are far behind.
  6. Start an interest penalty for late payments. Once a bill becomes seriously overdue, you may have to resort to penalties. You should sympathise with hard-pressed customers for a reasonable time, but don’t let their problems put a drag on your cash flow.
  7. Take precautions when extending credit. Require all new customers to fill out credit applications and check credit references. A written agreement at the onset of a business relationship can help avoid misunderstandings later on. Spell out the terms of the arrangement on the credit application. You might want to go a step further and have customers sign a separate statement or contract stating when payments are due and noting that the other party is liable for any legal or arbitration costs if a bill is not paid. If your business is extending credit to a financially troubled business, insist on securing personal guarantees from the owners, as well as their spouses.
  8. Trim expenses and cut unnecessary spending. Look for ways to reduce waste in office supplies, business-owned vehicles, mobile phones and land lines, utilities, business travel, overtime pay, insurance, and more. Your employees may also come up with ideas management hasn’t thought about. Dispose of unused vehicles, vacant real estate and unnecessary machinery. They could be costing you insurance, maintenance and storage costs. Selling idle assets can boost cash flow and donating them to a qualified charity can be smart tax move.
  9. Keep your inventory lean. As a rule of thumb, the expense of maintaining inventory averages about two percent of the cost of the goods for each month they are not sold. If your business carries an item for a year, it’s down 24 percent. It’s hard to overcome this kind of cost handicap — especially in difficult economic times. Don’t fall into the trap of hanging onto slow-moving inventory to avoid admitting you made a mistake. Cut your losses on old and outdated inventory items or donate them and claim a tax deduction.
  10. Look for valuable tax deductions you may have overlooked. Consult with your tax adviser to see if there are potential opportunities or steps you should take to reduce your tax bill.
  11. Free up cash by leasing. Leasing computer equipment, cars, facilities, tools and other gear generally costs more than buying, but you avoid tying up cash. You can also limit your exposure with short-term leases.
  12. Examine prices. Many business owners and executives won’t consider increasing prices in a tough economy because they’re afraid customers will head to the competition. But it may be necessary if your prices aren’t keeping pace with expenses. If you do raise prices, explain the reasons to your customers, and if possible, give them notice. Emphasise the value of your products or services.

These ideas are just some of the ways your business can improve cash flow. Consult with your adviser who can help review cash flow statements, find weaknesses, and devise solutions to maintain a healthy balance between the money flowing in and out of your organisation. Or contact Commercial Associates on 02 9299 1200 to arrange a complimentary discussion with myself or our expert advisors.

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