Improve Cash Flow

With April 15th on the horizon, managers’ thoughts often turn to cash flow. Or the lack thereof. For many, prior year planning never happened and a substantial tax bill looms. What can be done to improve cash flow?

It’s a question we hear with some frequency. My partners and I at Worldwide Local Connect (WWLC) have run our own businesses. We’ve weathered similar cash crunches. While every situation is different, if you are facing a cash shortfall we recommend taking these initial steps:

Manage Working Capital
A surprising number of small businesses take a laissez faire approach to receivables collections, inventory turnover, and bill payments. When faced with insufficient cash flow, an aggressive approach is needed. Including:

Receivables
Redouble efforts to collect outstanding invoices, offering discounts or payment plans, if necessary. Consider legal collection measures for uncooperative customers with large outstanding balances.

Inventory
Identify slow moving merchandise, pricing it to move. Be more proactive managing inventory levels; review your order quantities and use metrics like Inventory Turnover, and Days Sales of Inventory. Operate closer to a JIT system.

Payables
We see a number of small businesses that pay their vendors in less than 30 days while collecting from their customers in 45. It’s a mismatch. Consider stretching non-critical vendors.

Change Customer Invoicing
Still emailing invoices and waiting for checks to arrive?  Why not offer customers a range of payment options, like a credit card, PayPal, ACH Direct Debit, bank transfer, or a global payment method, such as EPS, iDEAL, and WeChat Pay?  Many cash strapped customers will pay by credit card if given the option.

When updating your billing procedures consider changing your payment terms as well. For ACH or check payments, offer a fast payment discount (2% 10, net 30, for instance). Be sure to include language stating that you will charge interest on past due invoices and reserve the right to cut off non-paying customers when their bills are more than, say, 60 days past due.

Be aggressive, not apologetic. Switch slow paying customers to automatic (credit card) billing. Should they refuse, consider cutting them off. Why? Because slow paying clients seldom reform; you’ll be chasing them again for payment in a few months’ time.

Cut Costs
Cost cutting can improve cash flow, too. I will address this subject next month in my blogs about improving profitability.

For now, these are some initial steps to improve cash flow. In my next blog post I will describe longer-term solutions to small business, cash flow problems.