Cash is King: 5 Steps to Improve Cash Flow

small-business-cash-flow-(2)For most businesses, cash is king. Finding ways to optimize the flow of money through your business is essential.  Even if you are a profitable business, you may find yourself cash-strapped if you don’t keep an eye on your cash flow position.

With payrolls to meet, supplier bills to pay, taxes to remit and capital investments to make, the very existence of your business can be threatened by poorly managed cash flow.  All businesses periodically suffer at the hands of customers who are late in their payments. For some customers, this is a constant state; for others, it’s a temporary situation because of their own business circumstances.

Here are 5 ways to help your business cash flow:

1. Manage Your Accounts Receivable

A proactive Accounts Receivable collections effort is the top of the list. Your cash position impacts your ability to do business, so stay on top of your Accounts Receivable aging reports on a weekly basis. Be aware of how long on average it takes for you to receive payment and watch for any trends that show this is lengthening.

If not already in place, there should be a stated billing policy that is communicated to customers.  The invoice and follow-up process should start as early as possible. Get your invoices out as soon as the product ships or the work is completed. Be clear on your invoice what your terms are and enforce them. Automate the process of sending out statements and past due notices on a timely basis.

If the past due notice doesn’t work, call your customer. Past due notices that are followed up with a “friendly voice reminder” often bring payments in sooner.  Your invoices and statements should clearly state the penalties that will be assessed for late payment and on all follow-up notices. Interest or penalty fees should be highlighted.

2. Reward Early Payments

Customers respond to discounts and like the idea of being rewarded for being a good customer.  By offering a discount for payments received prior to the due date, you’ll have more cash on hand and more loyal customers. You can also offer discounts when orders are paid up front or with a deposit. If you offer a discount and the customer takes the discount without meeting the terms, send them a bill for the balance. Don’t reward non-compliance.

3. Negotiate with Your Suppliers

You won’t be the only one offering discounts for early payment.  Many of your suppliers will do the same thing. You may have to negotiate a discount with them, but many of them are also concerned about cash flow and will likely entertain the idea.  Conversely, you can also negotiate payment extensions that will reduce the monthly outlay.

4. Accept Credit Cards

For customers with tight cash flow, offering credit card payment can be an effective way to improve your collections. You’ll have to pay the merchant services fees, but this may be a worthwhile investment when you factor in the cost of collections and your own need for cash flow. You might consider offering that as a payment option at the point of sale so that you can collect the customer’s credit card information ahead of time and simply bill it at the point of shipment.

5. Manage Your Bill Payments

You want to collect as quickly as you can and pay as slowly as you can. Use the billing cycles that are built into the payment terms of your creditors to manage your cash out-flow. This includes your credit cards as well as your vendors.  Study your creditors’ payment terms to learn when their billing cycle starts and the length of their grace period, if they have one. Consider making the payments exactly on the due date using an automatic electronic payment rather than paying in advance. This has to be handled carefully, as you don’t want to jeopardize your credit rating or your relationship with your suppliers, but it can be an effective way to help match your cash out-flow with your collections.

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