Institute sound credit practices.
Check credit information on new and
existing customers thoroughly before offering any
credit. For new customers obtain at least three trade
references. Also, consider using a commercial credit
reporting service, such as D&B, to verify a
borrower’s creditworthiness. Never grant credit until
you’re comfortable with a customer’s ability to pay,
and request a deposit—which would vary from industry
to industry—from a new customer, particularly if an
order is large or requires you to purchase parts or
supplies before completing the work. This not only
helps cash flow, but also can cement the transaction.
Bill promptly. Mail invoices
the day you complete the work or the product ships.
If a job takes a long time to complete, notify the
customer in advance that you intend to bill in
stages.
Accelerate accounts receivable. S
ome customers will pay sooner if you
provide an incentive. Consider offering a discount
to fast payers. This could attract new customers who
look at cash discounts as a form of price reduction.
Depositing checks promptly also would help your
business’s cash flow. Don’t feel guilty
about asking to be paid on overdue accounts.
Aggressively pursue payment of overdue invoices. If
an invoice reaches 45 days beyond your agreed-on
payment terms, engage the services of a collection
agency.
Pay bills on time but not before they are
due. When paying bills, take as
much time as the creditor allows without incurring
late fees or interest charges. An exception to this
rule may apply when suppliers offer a discount for
early payment.
Monitor inventory levels. A
company’s profitability depends on the successful
and timely sale of its products and services.
Maintaining inventory levels at less than what is
needed to support demand may result in lost sales
and delays for customers. On the other hand, excess
inventory places a burden on cash resources.
Compare inventory turnover with industry norms,
and rely on historical sales data and forecasts to
set inventory levels. Stock sitting on shelves for
long periods of time ties up money that could be
used for other cash outflows. Sell off outdated,
slow-moving merchandise. Donate what can’t be sold.
Manage suppliers. The
easiest way to slow down a business’s cash outflow
is to negotiate with suppliers for more favorable
terms. While most suppliers want payment in 30 days,
some may be willing to extend terms for a regular
customer with a good payment history. Longer payment
terms will benefit you by keeping your money in your
business longer. Developing multiple sources of
supplies keeps vendors on their toes. Finally, do
not buy more than you need or more than you expect
to sell, regardless of how favorable the sale or
credit terms.
Consider leasing equipment instead of
buying. I n the long run leasing
equipment generally costs more than buying, but the
cash-flow benefits may justify the increased costs.
Expensive equipment purchases can tie up cash that
you could use for day-to-day operations.
Communicate and manage cash-flow
strategies. Be sure to inform
staff members how they can contribute to improving
cash flow and monitor their efforts. If cash is
tight, consult with your CPA for more specific
strategies on improving the company’s cash flow.
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