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5 Ways to Improve Cash Flow

5 Ways to Improve Cash Flow

By: Inc.com
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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.

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.

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.

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.

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.

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:

  • How long is it taking to get paid?
  • What is your collections activity?
  • Are you getting the right level of contact with your customers?

Keep in mind that these are not only ways to improve how quickly you get paid, but your customer service as well.

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.

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.

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.

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By:  Matt Quinn

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