Cash is King! You’ve surely heard this phrase before. And if you’re running a business or own one, chances are you subscribe to this concept passionately.
There’s quite a difference between a business’ profitability, and its liquidity. By the latter, we mean its ability in settling various financial obligations from sales generated and collected. (Quite often, you will find a business that’s very profitable, but struggles month after month with payroll, rent, and other expenses.)
This is the direct result of a business’ accounts payables and accounts receivable not being in synch; i.e. revenues are collected at a slower pace than bills mature and become due.
Following are some tips you can implement to improve your cash-flow position so that you are not only profitable, but cash-flow positive at all times.
Be careful with whom you do business
Don’t do business with customers that are known to frequently pay their bills late. At the same token, get out of relationships with those that have been driving you crazy month after month. The frustration will impact your work and at the end, nobody in the relationship will be happy.
Negotiate your terms carefully
This applies to both, your A/P and your A/R. The payment cycle of your A/P should always extend beyond your typical collection period for your A/R. In other words, if your customers take typically 30 days to pay you, you should negotiate 45-day payment terms with your suppliers just to be on the safe side.
Don’t let A/R age too old
Keep in mind, the older your invoices age, the more difficult it will become to collect them. Also, if you are in a recurring relationship, your A/R will pile up really fast and reach a point where they become noncollectable.
Establish lines of credits for your customers
Just like banks assign limits to credit cards based on income and typical spending patterns, you can do the same. For example, if a customer’s monthly volume averages at JD2,000, there’s no reason why you should agree to ship product worth JD 10,000 all of a sudden. You can make a safe assumption in that he/she will struggle to pay the invoice in a month.
Big business is not always good for you
We all dream of landing that mega contract, with the assumption that this will boost our financial situation significantly. While this is true, the problem with these big accounts is that they usually dictate extended payment terms. 60 or 90 days are not unheard of, and you will be most likely subjected to this kind of waiting period until you get to see your money in the bank.
Consider offering prompt-payment discount
If your terms are 30 days, you can offer an additional discount of 2% for invoices that are paid within ten days or less. This is not all that appealing to small businesses, but your large customers will go for it as they a) have the cash to pay your bills at any time, and b) are always on the lookout to improve their bottom line.
Watch your growth!
Astronomic increases in sales can actually hurt you if you’re not prepared to finance those. Remember, with increased sales comes a higher need for inventory in stock or human resources on payroll. If you can’t afford those, you won’t be able to keep the momentum going and start being late on delivery dates. This will upset those new customers you just acquired, and if you keep it up, they might walk again.
Send monthly statements of account.
This is not always a common practice, yet a very effective one. Invoices tend to be forgotten or misplaced. If you mail (or email) monthly statements at the end of each month reflecting charges and payments made during the previous months, your chances of getting paid will improve. A decent accounting software will also group A/R nicely into aging groups, so your customers know exactly what’s past due and payable immediately.
Last but not least, set a good example. Just as you would love for your customers to pay you on time, your suppliers want you to do the same. Commit to your own bills by paying those in time. “You know how the saying goes; what goes around comes around.”
About the Author
Pinnacle Business & Marketing Consulting is a results-driven boutique consulting firm that specializes in providing clients with practical and pragmatic solutions to their business and marketing challenges.
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