Thursday, May 22, 2014

Improving your cash flow: part I

There is a popular saying in business: Cash is King.  Having adequate cash flow is crucial and many a business fails due to a lack of cash.  What drives cash flow?  Accounts receivable, inventory, accounts payable and debt payments are the main drivers.  We will talk about accounts receivable management this week and address the others in subsequent weeks.

Managing accounts receivable includes setting the terms you offer your clients/customers as well as enforcing those terms.  You should consider what terms your suppliers give you when determining the length of time you offer your customers.  If you have to pay for your materials in 30 days, you should think twice about offering your clients 60 days.  Of course, industry standards should be considered as well.

Once you have set your terms, you need to make sure customers are aware of them.  If you sign contracts, the terms need to be in the contract.  They should also be on all of your invoices and sales receipts.  It is also good to mention them verbally to new customers to make sure they really understand how soon you will be expecting payment.

Finally, you need to enforce your terms.  There are certain businesses who won't pay until you call them.  It is not that they aren't aware of your terms, it is just that they are short on cash themselves so they only pay the vendors who call and ask for payment.  If you set terms of 15 days, you should be calling or emailing on day 16 if you have not received payment. It doesn't have to be a contentious exchange.  I find that the simple "I haven't received your check yet.  Do you think the mail has lost it?" works quite well.  You usually get a quick apology as they forgot to mail the check.  Sometimes, they really did forget and sometimes they were waiting for you to ask.  If they promise to mail it out today, then make note and follow up again if you don't receive the payment as expected.

If you continue to experience delays or difficulties collecting, you should consider whether you want to continue doing business with the customer.  Don't hesitate to go to small claims court or use other legal methods to collect if the outstanding bill is large enough.

No one enjoys making collection calls, but it is part of doing business.  Collecting accounts receivable on time is very important to the success of a business.  Next week, we discuss inventory management.

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