How much does it cost your business to borrow money? What if you need it immediately? In addition to interest charges and fees, you may have to deal with the time and stress associated with plugging a cash gap that could cause you to miss payroll. If your business is chronically short of cash, it may be time to find a permanent solution to your cash flow management issues. It’s easy to say “just sell more” but that may not help with cash flow. It may be difficult to replace proper cash flow management with more sales or more anything; it’s one of those things that can be helpful to owning a successful company.
Accounts Receivable: Incoming Cash Flow From Operations
Accounts receivable management represents one possible opportunity to improving your business cash flow. The challenge for many business owners is identifying the problems and opportunities in their accounts receivable departments. But it may be hard to improve what you can’t measure: One way to know what’s really going on in your accounts receivable department is by measuring its performance. There are certain Key Performance Indicators (KPIs) that may alert you to possible flaws in how you handle collecting cash from customers.
Asking these questions may help:
- How many of the invoices that I send out each month are paid on time versus paid late?
- What percentage of my invoices is paid with a discount? Is the discount pre-approved or did the client pay less than they should have?
- What percentage of my accounts receivable are sent to collections?
- How much time passes between the moment I can invoice a client and the time they receive it?
- Are there any problem customers that are always paying late?
Tracking certain cash flow KPIs may help you answer these questions. A simple MS Excel sheet may be a good way to start if you don’t have software in place to generate these statistics. Consider measuring:
A/R aging: This table would break down your accounts receivable balance by the amount of time it has been due grouped monthly. It may help you understand how long it takes you to get paid. Seeing patterns over time of cash taking longer to come to you from clients may also be helpful. A typical A/R aging schedule will be organized into balances outstanding: less than 30 days, from 30 to less than 60 days, from 60 to less than 90 days and greater than 90.
Discounts: This table would measure the amounts and percentage of invoices that are paid with a discount. Typically businesses offer a small discount for invoices that are paid early. For example, 2/10 net 30 means that you will offer a 2-percent discount on invoices paid within 10 days of receipt; otherwise the client must pay the balance within 30 days without a discount. Sometimes clients may automatically apply the discount even if they don’t comply with the terms. Or perhaps too many clients are accepting the terms, leaving you with 2 percent less cash on each invoice in exchange for a small benefit. Seeing this measurement may help with your cash flow management concerns.
A/R performance per X: You may want to look for patterns in your A/R. Consider preparing tables of A/R sales person, by customer and by method of payment. Doing so may reveal customers who continually abuse discounts. It may also reveal if a certain salesperson consistently closes deals with companies that pay late. Or perhaps customers who you extend credit to aren’t being pre-qualified properly, leading to high charge offs.
Accounts Payable: Outgoing Cash Flow From Operations
In order to improve your outgoing cash flow, you may want to send out your cash payments at the last possible moment without incurring penalties. Not paying a bill today if you can pay it in 25 days without incurring interest or penalties may be helpful in addressing your cash flow management concerns. This may help build a cash cushion for your business that could handle unexpected expenses as well as those regular payments—like payroll—that absolutely must be on time.
Payment terms: Contacting your vendors and asking them for better payment terms may be a good place to start. If you have at least six months of paying your bills on time, asking for 45 days instead of 30 days to pay may be reasonable. Also you may want to see if you are receiving discounts for invoices that you pay quickly.
Positive cash cycling: A business with a positive cash cycle may have invoices related to cost of goods sold due after the goods are sold and customers are paid. This is a spectacular way to boost your cash flow. If your business sells goods in 30 days and pays invoices on 45 days, the chances of you having a cash shortfall may be lower. There are different ways to accomplish this including charging customers up front, negotiating longer payment periods with vendors and looking for distribution channels that can move your inventory in less time.
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