When I was a young accountant, someone gave me a button that said "I Love Cash Flow". I had it pinned to my cubicle and I often teased my co-workers when they would ask to borrow money for lunch near the end of the month that they, as CPA's, should be able to manage their personal cash flow better! Cash flow management has many components and we will address them over the next few weeks.
A business can take a couple of simple steps to manage its cash flow. The first thing you can do is to compare the terms your vendors offer to the terms you offer your customers. If your vendors expect to get paid in 15 days but you give your customers 30 days to pay, you are going to run into problems. A business should consider what its competitors are offering as far as terms go, whether the customer has earned lengthier terms and what kind of flexibility it has with its vendors.
It is not unusual to require payment up front or at the time of service for new customers and then to offer extended terms once a good relationship has been established. It is a good idea to do a credit check on any business you are considering offering extended terms to.
If your vendors are unable to offer lengthier terms and you feel you must offer longer terms to your customers, a line of credit may be the answer. This will provide your business with the funds to pay your vendors and then you can pay it back when you are paid by your customers.
Receivables and payables are just two components of cash flow. We will discuss others in the weeks to come so stay tuned.