MILLENNIUM
NEWS FOR SMALL BUSINESSES:
TEN WAYS TO IMPROVE YOUR CASH FLOW
It's the topic of books, the focus of seminars, and a critical part of most business plans. Why all the fuss? Easy. Cash flow is the lifeblood of a business. Whether you're a mom and pop operation or the latest Internet start-up, a healthy cash flow is essential for small business success.
The key is to accelerate your cash inflow and postpone your cash outflow. Here are ten tips to get you started.
1. ESTABLISH SOUND CREDIT PRACTICES
When dealing with new customers, always obtain at least three trade references and a bank reference. Credit information reports, such as those supplied by Dun and Bradstreet, can report a firm's general financial condition, as well as how quickly (or slowly) the company pays its bills. Never grant credit before you are comfortable with the customer's ability to pay.
2. EXPEDITE FULFILLMENT AND SHIPPING
Make every effort to fill orders accurately and efficiently, and then use the quickest means of delivering your products or services to your customers. Unnecessary delays in filling orders or delivering services can add days or weeks to your cash inflow, not to mention give your customers a negative impression.
3. BILL PROMPTLY AND ACCURATELY
The faster you mail invoices, the faster you'll be paid. Where possible, an invoice should be sent when the order is shipped. If deliveries do not automatically trigger invoices, establish a set schedule for invoicing, preferably weekly. If you're doing a job that takes a long time to complete, bill in stages.
Check invoices before mailing to ensure accuracy. An invoice should include the date it was prepared, the customer's name and address, a description of the goods or services delivered to the customer, the amount due, and when payment is expected. Invoices without payment terms may automatically fall to the bottom of customers' payment piles.
4. OFFER DISCOUNTS FOR PROMPT PAYMENT
Some customers will pay sooner if you give them an incentive to do so. Trade discounts typically give customers one percent or two percent off the total amount due if payment in made in 10 days. Consider offering such a discount to customers who pay promptly -- especially if this is a common practice in your industry.
Many businesses deal with each collection problem on a case-by-case basis. You can benefit from establishing written credit and collection policies in advance. These policies represent a systems approach to help you and your employees determine who should get how much credit and what will happen at various stages in the collection cycle. Using a systematic approach will improve your cash flow. A credit and collection policy may include some of the ideas that follow below.
5. AGGRESSIVELY FOLLOW UP ON PAST DUE ACCOUNTS
As soon as a bill becomes overdue, call the customer and ask when you can expect payment. Note the content of your conversation and the customer’s promises for future reference. Set a date for following up in the event payment is not received. If you have delinquent customers with genuine financial problems, try to get at least some small amount every week. Don't accept too many promises before you bring in the professional help of an attorney or collection agency.
6. DEPOSIT PAYMENTS PROMPTLY
Once you receive payment, don’t let the check sit in a drawer waiting to be deposited. The sooner you make the deposit, the sooner you can put the money to work in your business. If you're really serious about speeding up your cash flow, a post office box or lockbox banking can accelerate the receipt of checks.
7. SEEK BETTER PAYMENT TERMS FROM SUPPLIERS AND BANKS
The simplest way to slow down your company's outflow is to negotiate better payment terms with your suppliers. Although most suppliers provide terms of 30 days, terms of 60 and 90 days are sometimes available. If you can get better credit terms, essentially you have borrowed money interest-free. Sometimes getting longer payment periods may mean changing suppliers. However, faced with this possibility, your current supplier might agree to meet your company's needs. If it's your bank loan payment that is choking your business, talk to your banker about restructuring.
8. KEEP A TIGHT CONTROL ON INVENTORY
Less cash tied up in inventory typically means better cash flow. Suppliers are often willing to offer deeper discounts on volume purchases, but if that inventory sits on the shelf for a long time, it is tying up money that could be put to more productive use.
9. REVIEW AND REDUCE EXPENSES
Take a critical look at all expenses to determine if they are truly necessary. If you're not sure, hold back until you are confident that the expense will favorably impact the bottom line. Keep your eyes open for ways to decrease operational costs. For example, switching from weekly to bi-weekly payroll can reduce payroll-processing costs significantly and slow your cash outflow. Do not reduce critical costs that will potentially reduce your “top line.” For instance, rather than reducing marketing costs, consider redirecting the expenditures to generate a more positive impact.
10. PAY BILLS ON TIME, BUT NEVER BEFORE THEY ARE DUE
The basic rule of delaying cash outflow is to take as long as you're allowed (without incurring late fees or interest charges) to pay your company's bills. Consider making an exception to this rule only when you are offered a trade discount for early payment.
If you need help maximizing your business's cash flow, consult with your financial advisor.