No matter what the economic environment, every business needs to maintain a healthy cash flow. Now that the impact of the pandemic appears to be waning, don't abandon the good principles you've likely picked up over the last couple of challenging years.
Companies 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.
In other words, cash flow is the heartbeat of your business. Keeping it stable requires juggling most aspects of your operation, including accounts receivable, payroll, credit and inventory.
With that in mind, here are a dozen general 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. Determine whether your suppliers offer payment incentives. Some companies offer a discount for paying early. In addition to asking about early-payment incentives, inquire about special terms that accommodate your cash flow needs. For example, see whether you can defer payments or pay a lower amount until after your busy season (if you have one). Many suppliers are willing to offer incentives in order to cement long-term relationships with good customers.
3. On your end, offer customer discounts to early payers. Turnabout is fair play. Consider offering a 1% or 2% discount if bills are paid within 10 days of delivery. It may slow cash flow in the short term but, if customers bite, you'll likely see a positive long-term effect.
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 doing so is appropriate in your industry, ask customers for a deposit before work begins.
Remind customers of your credit terms. Check your invoices or statements to ensure the payment due date is clearly indicated. Encourage customers to online or pay with fund transfers.
5. Consider establishing an interest penalty for late payments. Once a bill becomes long overdue, a penalty can sometimes teach a payer that pushing off payments has financial consequences. Although you might sympathize with a customer that's been affected by circumstances beyond its control, you can't let the customer's problems drag down your cash flow. Otherwise, you'll both be in the same boat.
6. Closely track and collect overdue accounts. If you don't already, ask your accounting department to regularly generate accurate reports on overdue payments. Monitoring accounts receivable in this manner can reveal trends and early warning signs.
Establish a clear, methodical process for handling past-due accounts. Typically, the first step involves sending emails and/or letters to tardy customers. Next, use telephone calls. Instruct employees to obtain a verbal commitment to pay by a specific date. Consider giving staff members financial rewards when they collect long-overdue bills.
From there, if overdue payments persist, tougher measures are warranted. Put problem customers on a "cash on delivery only" status. Or simply stop delivering products or providing services until the matter is resolved. Using a collection agency is usually the final step. This is because, once you send an invoice to collections, you've probably lost the customer. But, in many cases, this might be unavoidable and the best thing for your business.
7. Don't extend credit without taking the proper precautions. Require all new customers to fill out a credit application. 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 isn't paid.
If your business is extending credit to a financially troubled company, look into the possibility of securing personal guarantees from the owners.
8. Trim expenses and cut unnecessary spending. Look for ways to reduce the cost of office supplies, company vehicles, cell phones and land lines, utilities, business travel, overtime pay, and insurance. Ask employees for cost-cutting suggestions. As the people on the "front lines" of business, they're often able to come up with ideas that haven't occurred to management.
In attention, look closely at your assets. Can you dispose of unused vehicles, vacant real estate or equipment you don't need? You could be paying insurance, maintenance and storage costs on these items. Selling idle assets can give your cash flow a boost, while donating them to a qualified charity can lower your tax bill.
9. Keep inventory lean. One rule of thumb says the expense of maintaining stock in inventory averages about 2% of the cost of those goods for each month not sold. That means, if your business carries an item for a year, you're down 24%! It's hard to overcome this kind of cost handicap — especially in tough times.
Don't fall into the trap of hanging onto slow-moving inventory in order to avoid admitting you've made a mistake. Liquidate old and outdated inventory items, even at a loss if you must, or properly 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 advisor to see whether there are opportunities or steps you should take by year-end to reduce your tax liability.
11. Explore leasing rather than buying. Leasing computer equipment, vehicles, facilities, tools and other items generally costs more in the long-term than buying when you add up the interest. Nonetheless, leasing frees us cash in the short term. You might be able to mitigate the worst financial exposure with short-term leases.
12. Adjust prices as necessary and prudent. Many business owners won't consider increasing prices because they're afraid customers will bolt for the competition. Others won't lower prices because they fear a severe negative impact on profitability. Proper pricing is a delicate operational instrument that calls for regular reassessment and occasional adjustment.
Now that rising inflation has become an issue, your prices might not be keeping pace with expenses. So, a price hike is certainly a possibility. If you do raise prices, explain to customers why and, if possible, give them plenty of notice. Emphasize the unique and total value of your products or services.
These are just a few of the ways your business could be able to improve cash flow. Consult with your CPA on some approaches tailored to your exact circumstances. Your accountant can review your financial statements, identify strengths and weaknesses and come up with customized solutions for maintaining a healthy balance between the dollars flowing in and out of your company.
Get in touch today and find out how we can help you meet your objectives.
