Maintain a Healthy Cash Flow

One major concern for businesses is maintaining a healthy cash flow. Enterprises that successfully practice good cash management generally survive and prosper. Those that don’t are likely to be undone by the weight of increasing debt and the inability to pay employees and suppliers.

Cash flow is the heartbeat of your business and keeping it stable requires juggling most aspects of your operation, including accounts receivables, payroll, credit and inventory.

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

1. Take the maximum time to pay your suppliers. Essentially, this amounts to an interest-free line of credit and gives you more time to use your working capital.

2. Check to see if your suppliers offer payment incentives. Some companies offer a discount for paying early. Even if your business regularly purchases a substantial amount from another company, you’re in a good position to negotiate favorable 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, in order to speed up their own receivables and cement long-term relationships with good customers.

3. On your end, offer customer discounts to early payers. Consider providing a one to two percent discount, if bills are paid within ten days of delivery. It may cost you a little, but it can also light a fire under slow payers — and have a major positive effect on your cash flow.

4. Examine payment terms and your billing schedule. If possible, send an invoice with your shipments — not separately afterward. Waiting until the end of the month can add as many as 30 extra 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 reveal early warning signs. Act immediately on past-due accounts and use a collection agency, if necessary. Telephone tardy customers and obtain a payment commitment by a specific date. Consider giving staff members financial rewards when they collect long-overdue bills.

Don’t keep delivering services or shipping goods when payments are far behind. Put problem customers on a C.O.D. system, or stop shipments altogether.

6. Consider establishing an interest penalty for late payments. Once a bill becomes long overdue, you may have to resort to penalties. While you can, and should, sympathize with hard-pressed customers for a reasonable amount of time, don’t let their problems drag your cash flow down.

7. Don’t extend credit without taking the proper precautions. Require all new customers to fill out credit applications. Request 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 your credit application. You might want to go one step further and have customers sign a separate statement or contract identifying when payments are due and 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 company, 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, company vehicles, cell phones and land lines, utilities, business travel, overtime pay, insurance and more. Ask your employees for cost-cutting suggestions. They are likely to come up with ideas management hasn’t thought about.

Dispose of unused vehicles, vacant real estate and machinery you don’t need. You could be paying insurance, maintenance and storage costs on them. Selling idle assets can result in a cash flow boost, while donating to a qualified charity can be a tax-wise move.

9. Keep your inventory lean. As a rule of thumb, the expense of maintaining stock in inventory averages about two percent of the cost of those goods for each month not sold. If your business carries an item for a year, you’re down 24 percent. It’s hard to overcome this kind of cost handicap — especially in hard times.

Don’t fall into the trap of hanging onto slow-moving inventory in order to avoid admitting you made a mistake. Cut your losses on old and outdated inventory items or donate them and claim a charitable tax deduction.

10. Speaking of tax deductions, look for valuable opportunities you may have overlooked. The complex Internal Revenue Code is filled with breaks for various industries and taxpayers in certain situations. Consult with your tax adviser to see if there are potential opportunities or steps you should take by the end of the year to reduce your tax bill.

11. Free up cash by leasing rather than buying. 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 company owners and executives won’t consider increasing prices in a tough economy because they’re afraid customers will head to the competition. However, 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. Emphasize the value of your products or services.

These ideas are just some of the ways your company can improve cash flow. Consult with your accountant who can help you review cash flow statements, find weaknesses and come up with solutions to maintain a healthy balance between the money flowing in and out of your organization.

© 2014


About MKS&H:

McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by advising them regarding their financial, technology and human capital management needs.

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MKS&H

McLean, Koehler, Sparks & Hammond (MKS&H) is a professional service firm with offices in Hunt Valley and Frederick. MKS&H helps owners and organizational leaders become more successful by putting complex financial data into truly meaningful context. But deeper than dollars and data, our focus is on developing an understanding of you, your culture and your business goals. This approach enables our clients to achieve their greatest potential.

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