Most business owners are looking for ways to squeeze as much cash flow as possible out of their existing operations. The basics are straight forward: collect your receivables as fast as possible and slow down your payables.
If you are serious about improving your cash flow, here are five important tips;
1. Get your forecasting right!
The first step is to make sure you understand where your cash flow currently stands and where it is likely to go in the future. If your business is growing, make sure you’re well prepared for the costs associated with expanding. For example, more sales could mean more employees and a bigger inventory.
Forecasts vary in complexity and style, with most companies needing a more formal cash flow projection. A rolling 12-month forecast is the best practice for most companies. If you start mapping things out week by week, you’ll be able to see where your expenses are likely to surge and when payments might come due all at once.
2. Check Your Terms
If you’re having trouble with cash flow, check to see how well your customer and supplier terms are balanced.
For example: If your average payable is 21 days and your average receivable is 40 days, that’s 19 days that you have to float, which means you have to go out and get working capital.
Have a look at the terms you’re offering to your clients / customers, and evaluate if they work for you and how your customers are performing to those terms. The same goes for suppliers – see how their terms compare to others in the marketplace. Some suppliers offer a discount if you were to pay your invoice earlier, which even though it might be counter to your aim of shortening the receivables – payables gap the money might be worth it.
3. Have a Good Collections System
- How long is it taking to get paid?
- What is your collections activity?
- Are you getting the right level of contact with your customers?
- Are you identifying disputes fast enough?
- When you identify disputes, what is your policy for getting them resolved?
These are not only ways to improve how quickly you get paid, but also your customer service levels.
Enforcing payment discipline should also be part of your payables operations. A sloppy accounts payable department might miss out on discounts and habitually paying late could hurt you the next time a contract comes up for renewal. By paying on time, you can build a relationship and negotiate for future discounts or payment terms better suited to your business cycle.
4. Break it Down
It’s a very difficult exercise trying to tackle your cash flow as a whole. To make it easier, segment suppliers, customers and inventory.
Inventory: Observe the volatility of sales and ask yourself the following;
- Do you have too much cash tied up in products that sell only sporadically?
- Would that money be better off used in your “bread and butter” items that turnover more quickly?
Suppliers: Separate your regular suppliers and one off buys. With your strategic suppliers, you will be more likely to be able to negotiate better terms and discounts.
Clients: Take a close look at your customers. It isn’t uncommon for your biggest clients to be one of the least profitable, and you may need a strategy in addressing this. It’s also not uncommon for your biggest clients to be some of the worst payers, and you will also need a strategy to combat this. There could be a good reason why your biggest client ends up paying late (e.g. invoice dispute). Once you identify this, you are able to fix it and also provide a better service to your client.
5. Team Priority
If improving cash flow is a priority for your business, make sure all your employees understand that. Remember that your employees will be motivated by the targets you set for them.
But even your sales staff should be on board. If a salesperson only has a revenue goal, he or she will work to meet it, regardless of whether the invoices are paid on time or in full. Instead, consider implementing a policy where, if something is written off, the revenue is taken out of commissions.