Easy Ways to Improve Cash Flow
 |
Discuss this Article No responses yet, be the first... |
- Credit management
- Invoicing
- Collections
- Conversion of receivables to cash
Credit management includes both deciding which customers you should extend credit to and determining credit terms. A credit sale is in effect a loan so learn from the experience of the mortgage industry - make sure your customers are willing and able to pay you. Don't hesitate to ask for a credit application and credit references and make use of credit reporting services to run checks. Also be aware of overall developments in the economy as certain industries are experiencing problems and may pose a credit risk. When appropriate for your industry and competitive situation, ask for a deposit before starting a large project or require payment at the time products or services are delivered.
Another credit strategy is to accept credit cards for payment. While this has been a common practice in many industries for years it is an approach that is not used as often by companies engaged primarily in business-to-business transactions. While there is a merchant service fee associated with credit card transactions this approach virtually eliminates credit risk and creates immediate cash availability.
Invoicing processes can often be made more efficient and effective. Be sure to invoice in a timely manner because your customers can't pay a bill they haven't received. Credit terms (Net 30, for example) should be shown and it is also helpful to include a "payment due" date. Your invoices must be accurate and complete - include all necessary supporting documents and forms. Make sure you have the correct address for billing - it may not be the same as the shipping address. Assure that PO numbers or other identifying information for the purchase is clearly displayed. This is especially important for large corporations and government customers that have very rigid payment processes that must be followed. Don't give them any excuses to delay or deny payment. Finally, make your invoices look as professional as possible. Most accounting software packages have a function for that purpose.
Collections are something no one likes to do. Many small business owners are uncomfortable asking a customer for payment for fear it will damage their relationship. The fact is that most businesses understand the need for a reminder and a call can often uncover administrative issues like missing invoices or approvals that could delay payment indefinitely. Asking for payment in a professional manner shows you are serious and can move things forward, particularly with customers that pay as slowly as possible to conserve their own cash. Also, send monthly statements to all customers and reminder letters when payments are overdue.
Once an invoice becomes seriously past due (generally over 90 days old) it is time to take action. Engage a professional collection service when invoices are between 90 and 120 days old for maximum effectiveness - don't wait until they are six months to a year old. Many collectors and attorneys operate on a contingency basis and retain 30%-50% of the amounts collected. However, there are services that perform collections on a fixed fee basis, charging approximately $10-$20 per account, and return 100% of the funds collected. This low-cost approach makes sense when the invoices are in the 90-120 day old range. Contingency-based solutions are the best strategy for older receivables since the likelihood of recovery declines with age.
Converting receivables to cash involves a financing strategy known as accounts receivable factoring. I have discussed this in more detail in a previous MindShare article which is available here. Briefly, factoring works well for companies engaged in business-to-business transactions, such Temporary Staffing, Manufacturing, Distribution / Importing, Transportation and Trucking, Advertising and Printing, Professional or Business services Factoring is best suited to newer businesses that are growing because the credit history of the business and its owners is not a primary concern.
John Doucette - Liquid Capital of Northeast Ohio - www.lcneo.com
