Every business owner knows that having healthy cash flow is imperative to the daily survival of running an enterprise in today’s economic environment.
But if your company is susceptible to the ups and downs of the economy, its ability to manage cash flow is even critical. Businesses that practice good cash management will typically survive and prosper in any economy.
Those that don't are more likely to falter under the weight of high debt and the inability to pay vendors and employees. Good cash flow management can give you the visibility needed to make sure your business carries on despite any and all unexpected circumstances.
Cash flow is the lifeblood of the organization and keeping it stable requires honing in on many aspects of your operation, including but not limited to accounts receivables, payroll, credit, and inventory.
With this in mind, here are a dozen helpful strategies to strengthen your company's cash flow:
1. Take the maximum time you can to pay your suppliers. This will give you an interest-free line of credit and more time to use your working capital; however, it is important not to take advantage of this, in that if you really need assistance from a supplier, he may not give it to you. In some instances, it may be better to pay suppliers timely and be known as is a good payer, rather than one that is not.
2. Check with your suppliers to see if they offer payment incentives. Some supplies will offer discounts for paying early. Even if you’ve been regularly purchasing from the company for a while, you’re still in a good position to negotiate late payment terms and early payment incentives. More specifically, ask for special terms that favor your cash flow requirements, such as negotiating the payment schedule during a busy season.
3. Offer discounts to customers who pay early. It may cost you a little to offer a discount, but it can encourage slow payers to pay sooner. For example, consider providing a two or three percent discount when bills are paid within seven days of delivery. This can have a major positive effect on your cash flow. However, you need to monitor this carefully so that customers do not take the discount and not pay within terms.
4. Re-examine payment terms and billing schedule. When it’s possible, send out an invoice with your shipments. Waiting until the end of the month can add an extra 30 days or more to your cash flow conversion period. Ensure your invoices or statements have a clear indication for when payment is due. Remind costumers of your credit terms and encourage them to pay with fund transfers or internet payments.
5. Closely monitor accounts receivable. To encourage good behavior and get your customers to pay on time, consider contacting them five days before payment is due with a friendly reminder. If their payments are not received on time, future services or deliveries may be put on hold. A courteous approach will go much further. Also, be sure your accounting department and or your collections department, prepare fast, accurate reports on overdue payments, and correspond with customers in timely manner. As a last resort, be prepared to use a collection agency.
6. Establish an interest penalty for late payments. The late payment penalty is an important tool for your cash flow cycle. Once a bill becomes overdue, you have the right to issue a penalty. Though you can, and should, sympathize with struggling customers for a reasonable amount of time but don’t let their problems negatively impact your cash flow.
7. Don’t extend credit without taking proper precautions. Require all new customers to complete credit applications and request credit references. Spell out the terms of your business relationship on the credit application and ask them to sign a written agreement on the arrangement to avoid misunderstandings later on. Always establish a credit limit. Additionally, you can have customers sign a statement or contract recognizing when payments are due which may subject them to liability for any legal or arbitration costs if the bill is not paid.
8. Cut unnecessary spending and trim expenses. There are many ways to reduce waste in your business and implementing just a few can make a world of difference. You can start with cutting back on office supplies, company vehicles, cell phones, utilities, business travel, over time pay, insurance, and more. Don’t be afraid to ask employees for suggestions to cut costs as they will likely come up with ideas management has not considered. Selling assets can also result in increased cash flow, while donating to a charity may be a tax-smart move as well.
9. Keep your inventory slim. You may be ordering more necessary because of a volume discount. It’s important to have inventory on hand to fill orders without delay, but excess inventory can drain the budget. Get rid of old and outdated inventory items or donate them and claim a charitable tax deduction. Inventory management is one of the most difficult to control. Implementing sound systems and procedures may seem burdensome but will save you money in the long-term.
10. Look for tax deduction opportunities you may have missed. The Internal Tax Revenue Code can seem complex and overwhelming, but it’s filled with breaks for various industries and tax payers. Consult your accountant for potential opportunities or steps to take by the end of the year to reduce your tax bill.
11. Lease instead of buying. Leasing equipment, computer, and cars can be more expensive in the long run, but you avoid tying up important cash. It also provides you with a way to keep pace with technology by upgrading equipment when your contract expires.
12. Examine prices closely. Business owners and executives usually don’t often increase prices during tough economic times, but it may be necessary if your prices are not keeping up with expenses. If you decide to raise prices, consider explaining why to your customers and give notice of when the price will increase.
When it comes to managing cash flow, there’s no easy, overnight solution. To remind yourself of these helpful strategies, bookmark or print out this infographic, 12 Ways to Maintain a Healthy Cash Flow, for future reference. Meet with an advisor who can help find weaknesses and come up with solutions to help you improve your cash flow.
About Barnes Wendling
Barnes Wendling CPAs, a Cleveland based financial services company, has been serving closely held businesses and not-for-profit organizations since 1946. Our team of educated, experienced professionals is dedicated to one goal: building and maintaining our clients' net worth. Over the years, we have developed a set of services to achieve this goal. We call it the BRISE Model, which focuses on planning in the areas of Business Development, Retirement, Investment, Succession, and Estate.