If you’re looking for a quick fix for cash-flow problems, good luck. But if you’re serious about making strategic changes, read on.
SIMPLE FORMULA: collect your receivables as fast as possible and slow down your payables without jeopardizing your relationship with suppliers.
If you're just looking for a quick fix, you can extend your accounts payable period by using a credit card to pay suppliers. With a check, you only get a day or two of float – or the time between when someone deposits your check and when the amount is removed from your account. But if you pay with a credit card, your vendor gets paid and you don't have to pay the card down for several more weeks. Of course, you don't want to charge more than you can pay off in a month or you'll get slapped with some hefty interest charges.
That's a simple – and fairly short-sighted – solution. But if you're serious about improving cash flow, here are five tips.
1. Perform a Good Forecast
Quite often small and mid-sized businesses aren't prepared for all the costs associated with growing quickly. More sales could mean more employees and a bigger inventory.
2. Evaluate Your Terms
If you're having trouble with cash flow, check to see how well your customer terms and supplier terms are balanced.
If your average payable is 24 days and your average receivable is 47 days, that's 23 days that you have to float, which means you have to go out and get working capital
3. Enforce Payment Discipline
In order to shorten your receivables period, you'll need to have a good collection system in place. You should ask yourself:
*How long is it taking to get paid?
*What is your collections activity?
*Are you getting the right level of contact with your customers?
*Are you identifying disputes fast enough?
*When you identify disputes, what is your policy for getting them resolved?
Enforcing payment discipline should also be part of your payables operations.
4. Segment Your Customers, Suppliers and Inventory
When looking at your inventory, you want to observe the volatility of sales. Do you have too much cash tied up in products that sell only sporadically? Would that money be better off used in your "bread and butter" items that turnover more quickly? "You might end up having tons of money tied up in inventory without actually meeting your customers' needs.
When breaking down your suppliers, you want to separate them into your regular suppliers versus your one-off buys. With your strategic suppliers, you'll have a better chance of negotiating better terms and discounts.
Perhaps most importantly, you should take a close look at your customers. Who really is a "key customer?" Just because your sales department thinks they're important – i.e. they generate a lot of revenue – that doesn't mean it's a profitable account. Norm Brodsky wrote last year about one business whose biggest account was actually a big money loser, ultimately adding to its cash flow woes. The solution isn't necessarily to cut that account, but to approach the customer with the situation.
5. Make it a Companywide Priority
If improving cash flow is a priority, make sure all of your employees understand that. Remember that your employees will be motivated by the targets you set for them. Obviously, collectors should have collection targets. But even your sales staff should be on board. If a salesperson only has a revenue goal, he or she will work to meet it, regardless of whether the invoices are paid on time or in full. Instead, institute a policy where, if something is written off, the revenue is backed out of commissions.
"If employees have a target, that's what they focus on," DeHaro says. "Make sure management teams support working capital objectives."