Maintaining Healthy Cash Flow Practices is Key to Sustaining and Growing any Business
Constantly monitoring, analyzing, and adjusting for economic downturns, seasonality, competition, and industry trends can position a company to take advantage of growth opportunities when they become available. Having the data available to make timely decisions is a management tool that should not be overlooked. Current internal financial reporting and relying on trusted advisors and industry contacts can alert management of potential near-term cash problems. Maintain open lines of communication with your staff to alert you on any issues that affect operations. Listed below are five things to consider when managing your cash flow practices:
1) Improve top line – Review your pricing structure. Are you making enough margin on your product or service? What are competitors charging for similar products or services? Be careful not to price yourself out of the market and lose a valued or potential new customer. If a price increase is warranted, talk to your customers first and don’t just surprise them.
2) Control cost – Review each expense item starting with the largest.
• The cost of material to produce your product is typically the largest line item on your profit and loss statement. Can you get it cheaper from another supplier without giving up quality or service? Maintain scrap levels at acceptable levels with proper staff training and maintenance of the M&E. Monitor costs through the production process and implement changes to ensure profitability.
• Are you properly staffed? Maintaining a staff too large for the backlog is a significant drain on cash for payroll and benefits.
• Annually review your insurance coverage on auto, health, and property.
• Negotiate favorable interest rates with your banker. Extending the amortization period on your term loans improves monthly debt service coverage and improves cash flow.
• Consider paying sales staff a smaller base and more on commission for business generated.
• Review utility use. Are there cheaper utility service options available? Consider installing energy efficient lighting or other equipment or phone services that save cash. Monitor uses to control costs.
• Review lease vs purchase options.
3) Quicken cash flow cycle – Improving conversion time from purchase of inventory to collection of receivable.
• Buy inventory for jobs which you have orders for. If you must keep a bank of inventory to meet customer needs, but sure to monitor the turnover of each item. A perpetual inventory system is preferred in tracking what is in inventory at all times. Check with suppliers for return policies that allow either cash or exchange for saleable product. Don’t allow inventory to sit on shelves without taking some action to move it.
• Implement a receivable procedure that confirms customer creditworthiness. Set terms and limits you can accept based on the credit risk and your cash flow needs. Be diligent in your collection efforts. Require acceptable invoice support in the event an account is being disputed (i.e. POs, shipping evidence, customer sign-offs, and any customer correspondence).
4) Extend payment terms with creditors – Negotiate favorable pricing and terms that allow for extended payment if possible (at least equate or longer than your receivable terms). If available, take advantage of discounts if cash flow allows.
5) Reduce tax liability – Talk to your CPA to discuss strategies to reduce your tax liability. Take advantage of accelerated depreciation options. Accelerate expenses and defer revenue when possible. Review available tax credits.
Monitoring cash flow practices and taking the appropriate steps to shorten receivables is extremely important in creating a successful financial environment. The combination of these five steps creates a significant, positive impact on your business and profits.