Poor management of cash flow is a common cause of companies forced into bankruptcy. Even businesses that report profits can experience problems. Many consume excess cash as a consequence of poor working capital management or aggressive accounting policies towards income recognition.
Of course, if the business is making losses, that will drain cash and needs to be turned around, unless this is the consequence of a planned period of investment in a well-funded business or a start-up or the scale-up phase of a business’ development.
Even then, and whatever the case, strong cash management is essential for survival and growth.
The following tips should help you to improve your cash flow management as well as reduce your stress levels:
- Be clear on your terms of trade with your customers and ensure all your customer facing staff know what they are.
- Credit check all new accounts.
- Invoice in a timely fashion. Minimise the gap between job completion and invoicing.
- Collect payment on completion/ fulfilment whenever possible.
- If you have a project that is delivered over several months, agree stage payments with the client.
- Give operations the responsibility to address outstanding customer service or delivery issues in a timely fashion, so that the customer releases payment to you.
- Assign competent staff to the credit collection function. You need people who are persistent, good on the telephone and have excellent influencing skills.
- Make sure that enough hours have been allocated to credit collection.
- Credit collection is a team game not just the responsibility of the finance department. Sales and operations involvement is sometimes needed to resolve product/ service delivery issues.
- Ensure the business leader takes a high level of interest in working capital management and doesn’t just delegate it to the finance department.
- Conduct regular 60 or 90 day outstanding debt reviews and take action to collect the monies.
- Identify the top three root causes of payment delays and fix those root problems.
- Use an automated sequenced letter process for overdue debtors.
- Put customers on stop who are overdue and have no valid reason for non-payment.
- Have a clear legal process that refers to solicitors those clients who are not paying and who have no good reason for doing so.
- Renegotiate credit terms with your key suppliers.
- Have payment runs with your creditors once or twice a month.
- Only buy stock for resale when you need it and you have a firm purchase order.
- Review your slow moving stock on a regular basis and take action to sell it and convert into cash.
There are many ways to improve cash flow. Use these as a checklist to see how many of the 19 methods you already have in place and which you need to implement to improve your cash flow.
Jim Rathbone is the Managing Director of Rathbone Results. Contact him here