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2010-06-30 15:37:30
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.
With revenue gains still something of a pipe dream for most businesses, owners
are looking for ways to squeeze as much cash flow as possible out of their
existing operations.
It's a simple enough formula: collect your receivables as fast as possible and
slow down your payables without jeopardizing your relationship with suppliers.
Still, some companies are much better at it than others: Top-performing
companies collected from customers 17 days more quickly than typical companies
in 2009 and stretched payables by an additional 10 days, according to REL, a
consultancy focused on improving cash flow and working capital and a division
of the Hackett Group.
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
The first step is to get a good grip on where you cash flow currently stands
and where it is likely to go in the future. 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. That s money going
out upfront. But when will it come back? "Too many companies get blindsided by
unfavorable movements in cash flow that are predictable if they really sat down
and thought through it," says Paul LaRock, a principal at consultancy Treasury
Strategies in Chicago.
The forecast could be as simple as paper and pencil for the smallest company,
but others will want to put together a more formal cash flow projection. A
rolling 12-month forecast is the best practice for most companies. If you start
mapping things out week by week, you'll see where to expect surges in expenses
ahead of your big sales season and where several payments might come due all at
once.
Dig Deeper: Plug Those Cash-Flow Leaks
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, recommends Analisa DeHaro, an associate
principal with REL.
"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," she says.
You'll want to look at the terms you're offering to customers and evaluate if
they work for you and how your customers are performing to those terms. With
suppliers, you want to see how their terms stack up against others in the
marketplace. You might also discover that you re missing out on a discount if
you were to pay even earlier. That might run counter to your goal of shortening
that receivables-payables gap, but the money involved might be worth it.
Dig Deeper: How to Set Up Accounts Receivable
3. Enforce Payment Discipline
In order to shorten your receivables period, you'll need to have a good
collection system in place. DeHaro says you should ask yourself:
Keep in mind that these are not only ways to improve how quickly you get paid,
but your customer service as well.
"If you buy something and something is wrong with the invoice, and it takes
them a long time to resolve it, it makes you have a little angst and make them
seem more difficult to work with," DeHaro observes.
And keeping on top of your problem children payers isn't just about looking at
the 90-days outstanding column in your account receivables, but even your
61-days and 31-days column, says LaRock. "You can t let things ride the extra
few weeks like you could in a healthy economy," he says.
Enforcing payment discipline should also be part of your payables operations. A
sloppy AP department might miss out on discounts and habitually paying late
could hurt you the next time a contract comes up for renewal. By paying on
time, you can build a relationship and negotiate for future discounts or
payment terms better suited to your business cycle.
Dig Deeper: Tips on Streamlining Accounts Payable
4. Segment Your Customers, Suppliers and Inventory
You probably won t get too far if you try to tackle your cash flow as a whole.
You're better off segmenting suppliers, customers 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," says DeHaro.
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.
You might also find that your biggest customers are your worst payers. You'll
want to put together a strategy on how to approach them. If a customer
typically pays in 60 days, you should gently reach out to it after 30.
Additionally, there might be a good reason why the client ends up paying so
late, like frequent disputes on invoices. "Once you identify the problem, you
can fix it and present a better service to your client," DeHaro says.
Dig Deeper: How to Get Customers to Pay Upfront
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."