Again, any business owner who has fended off calls from unpaid creditors or wondered how to meet the next payroll knows the importance of cash flow - and the frustration of being distracted by a cash shortage just when sales are booming. Yet, ironically enough, business success and cash shortages often go together.
If those skyrocketing sales are on credit, they create a huge accounts-receivable, which your company is funding. Your income statement may show a hefty profit, but profit doesn't pay bills - cash does! Profit is just an accounting measurement. Cash is reality. That's why understanding and controlling the cash flow in your business is so important.
There are three elements to cash flow management: collecting cash as fast as possible, paying out cash as slowly as possible, and making the best use of the cash held in your business. You should under-stand the way cash flows through these three stages and the timing associated with each.
In every business the major focus of the first stage must be monitoring the collection of receivables. This includes understanding the impact of factors such as the credit terms you offer and your approach to delinquent accounts. To speed cash collections you can invoice customers when you ship the goods, not a few days later. Make sure that your invoice clearly shows the payment due date and the penalty for late payment. If you use a monthly billing statement, time it to arrive a week or so before the end of the month. Many companies pay bills just before month-end, and that way you may catch their payment cycle. Another tip: Follow up promptly and in person on disputed bills or delinquent accounts. It's human nature to avoid these problems, but time only makes them harder to resolve.
Review your inventory to identify slow-selling and high-priced items. Are you carrying too many of these items? Can you make them special order items? Are there ways to cut your re-supply time, allowing you lower levels in inventory? Look for suppliers who deliver quickly so you can wait longer before reordering. Pay attention to turnover ratios and inventory backlogs when deciding when and how much to order.
There are many facets to running a profitable business. We hope these 17 ideas have started you thinking about ways to improve your business's bottom line. For details about any topic or for assistance with any of your business concerns, please give us a call.