By Jordan Horn
Whether it is a large corporation or a small mom and pop, cash flow management is critical to ensure long term success for your business. Even with operational revenue if cash is mismanaged your organization will not succeed. Businesses experience lags between the time you pay suppliers and the time you collect from your customers. Cash flow management attempts to delay payments or cash going out and speedup payments coming in from customers.
There are 7 tips to manage operational cash flows to improve liquidity in your business.
1. Issue invoices promptly. This might appear to be common knowledge, especially in small organizations with employees wearing many hats issuing an invoice for payment might feel like a chore when you can bring in an additional order instead and improve revenues. The sooner a customer receives an invoice the quicker they can verify receipt of items or services, get approval of payment, issue a check, and place in the mail.
2. Offer discounts to customers to incentivize a quicker payment. For instance, you could offer a “1-15, net 30” payment term. This would let customers know they will receive a 1% discount on their order if paid in 15 days. Otherwise they pay the full bill in 30 days.
3. Consider reducing sales to slow paying customers. If you have a list of slow paying customers or troublemakers who need some additional attention, consider limiting sales or requiring stricter payment terms such as a large upfront deposit or payment upon order submission.
4. Consider selling outstanding accounts receivable to a factoring company. Factoring your accounts receivables simply refers to selling your accounts receivable to a third-party company at a discount and then they collect on the debt.
5. Take advantage of flexible creditor payment terms. While you can encourage your customers to pay in a timelier manner you can also take advantage of discounts or look for vendors who have longer payment terms. The more flexible the terms the more you can save or the longer you can delay making a payment for products or services. Adding flexible payment terms in addition to price and services offered should be considered when committing to a new vendor or considering changes.
6. Use EFT, electronic funds transfers, to make payments on the last day they are due. This can be important especially if your company is seasonal. Waiting until the final moment will keep you in good term with vendors and keep your cash available in your checking account to make additional investments or cover other expenses when needed.
7. Sell or lease unused equipment. This might not be possible for all organizations; you should look around and consider if cash is being held up in equipment or inventory and that can be converted to cash for other investment opportunities.
Next time you need additional cash or you feel you aren’t maximizing your potential liquidity consider these 7 tips to improve operational cash flows. By shortening the gap between when cash is coming into your account from customers and when it goes out to pay expenses. And by managing your operational cash flows in addition to your revenues and expenses you will discover longevity in your businesses financial health.