Increasing sales doesn’t always equal increased cash flow, especially if the sales were credit sales. Thus, you can increase sales and accounts receivable but still have no cash in the bank account. Managing your cash flow effectively requires close attention, just like managing the rest of your business. The good news is that a little attention can go a long way towards increasing the cash balance at the bank. As with all good things, a little work is required so let’s look at how you can improve some of your operating processes which will increase CASH!
Here are a few tips that can have an almost immediate impact on your cash flow and cash position.
1) Set a price and term policy, then stick to it – You need to make sure all your employees understand the importance of discussing pricing and payment terms during the sales process. Often the emphasis is placed on “getting the sale” not “getting paid.” When customers delay payments, they’re using your cash and costing you money. Basically, you are financing their business. Be diligent about setting payment expectations right from the beginning with your customers.
2) Send out invoices in a timely manner AND follow-up promptly – The quicker you send out the invoice, the sooner the clock starts ticking for a customer to pay. Send out invoices promptly and follow-up immediately with a courtesy call. A courtesy call isn’t a collection call but a call just to check in with the customer and make sure the invoice has been received.
3) Review how your customers can pay you – Do you only accept checks? Are you still living in the 80’s? Get with it and offer other options such as electronic transfer, wire payment or credit card. Make it easy for the customer to pay you.
4) What’s in our inventory? – When was the last time you took a look at your inventory? Are you still selling Sony Walkmans? The 80/20 rule applies to inventory – 20% of that inventory is turning while 80% sits idle, taking up space and costing money to finance. Consider running a clearance sale or re-merchandising product to free up this cash.
5) Ask your vendors and suppliers for a discount! – When you purchase goods or services always ask if there is a discount offered for paying early or with cash. A 5% discount for paying now versus in 30 days is like getting a 60% discount on an annual basis. Don’t be afraid to ask, the worst they can say is “no.”
6) Customer deposits – If you’re offering aggressive pricing or giving concessions, don’t be afraid to ask for something in return. This is a great time to ask your customer to pay a deposit at the time of order, or prior to starting a job. This helps cover your up-front costs, and the risk associated with non-payment is decreased when your customer has some investment in the transaction.
7) Require a minimum order for credit sales – Invoicing, collecting, receiving and depositing checks is a time-consuming and expensive process. Establishing a minimum credit purchase requirement eliminates having to chase small amounts, promotes larger orders and collects payment for smaller ones at time of sales. A smart business move!
Cash flow is the life’s blood of your business. You can sell a million widgets but if you only get paid for 50% of them, your business is destined to fail. Making changes to your operating processes to promote positive cash flow is a way to keep your business healthy, vibrant and able to meet its obligations.