When we start to think about how cash flows through our business, it becomes clear there are two key areas where cash can get tied up in, stock (or inventory) and/or debtors (or receivables). Assuming we’ve managed our stock well, it is then about developing our Debtor Management skills. This involves ensuring we receive what is owed to us in a timely manner to help maintain and grow our business.
Cash is essential when it comes to the financial management of a growing company. The issue arises with the lag between the time you have to pay your suppliers and employees; and the time you collect from your customers. The solution is to shorten the time frame between cash going out and cash coming into the business.
If you got paid for sales the instant you made them, you would never have a cash flow problem. In reality that doesn’t happen. The basic idea is to improve the speed with which you turn materials and supplies into products, inventory into receivables, and receivables into cash. Here are a few specific techniques to assist from a cash collections perspective:
- Offer discounts to customers who pay their bills early.
- Ask customers to make deposit payments at the time orders are taken.
- Ensure you have a smart credit policy
- Require credit checks on all new account customers.
- Ensure you have a process in place to accept electronic payments.
- Issue invoices promptly and follow up immediately if payments are slow.
- Constantly review accounts receivable to identify and follow up on slow-paying customers.
- Implement a policy of cash on delivery (c.o.d.) as an alternative to refusing to do business with slow-paying customers.
The following are a few interesting statistics I have read with regards to Debtors Management
- Using words like “please” and “thank you” with regards to asking for payment can increase your chances of receiving payment by up to 5%.
- Over 70% of small business would prefer online payments
- Reminder letters increase your collection rate by over 4%
I recently worked with a client were implemented a few of these strategies to a portion of their aged debtors. By doing this we managed to reduce the 90-day debtors by over 10%.
Overall it is important for small business owners to examine their cash flow requirements and prepare cash flow forecasts. Consider the time between cash inflow and outflow.
Why not get in touch with us to see how we can assist you in this process?
Have a great month.
p: 0402 107 062
The Naked CEO – Alex Malley
Alex went from a suspended school boy to a disruptive CEO. As you can imagine he made many mistakes along the way. Here are tips he talks about that one should take after making a mistake
- Be accountable
- Work out what went wrong and learn from it
- Provide a recommended solution to the mistake
- Don’t let the mistake damage your self confidence
“Cash, though, is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent.” – Warren Buffet