You may have heard the expression that “The best time to borrow is when you don’t need the money.” This is because lenders and investors will both want to see that you’re able to make your payments, which is always easier while you have cash flow. They’ll also want to ensure that you are organized and involved with your finances behind the scenes.
Even when things are good and you don’t need to borrow there are some basic things that you can do monthly and annually to clean up your records and tighten up any “cash holes”. Here we have provided this checklist. The more you manage these areas, the easier it will be for you to produce what is needed should you need to borrow later on.
THE BASICS
Monitor Cash: Monitor cash flow regularly by keeping your banking accounts reconciled and the “books” in order so you’ll always know your cash position on a daily basis.
Invoice Timely: When products and services are rendered, mail invoices immediately! The faster your invoices are processed by your customer, the faster you’ll see receivables paid more quickly. Use email when sending invoices, it’s faster.
Pay Electronically: Use Electronic Payments. If you pay by ACH, Fed Wire, wait until the day a bill or payment is due. This “buying time” improves your cash flow, keeping your cash available to you.
Credit Checks: Conduct customer credit checks to help prevent bad debt.
Discounts: Offer discounts to customers to collect cash faster. Be sure to monitor this to ensure that the customer doesn’t take the discount and still pay slowly.
Supplier Terms: Negotiate longer supplier terms to buy time. Or, if your cash flow affords it, negotiate supplier discounts with your vendor if you pay twice per month.
Buying Cooperative: Join or form a buying co-operative with similar businesses as your own. When you do this, you can order supplies at the same time on a consistent scheduled to increase your buying power and sharing the savings.
Cut Cost: Annually audit your profit and loss statements to see where you can cut costs, like getting new quotes on insurance premiums, dropping unnecessary coverage, refinancing loans, or renegotiating better terms on equipment rentals.
Cash in on assets: Sell equipment no longer needed.
Inventory: Consider selling slow turning and obsolete inventory. Also, use vendors who can provide “just in time” inventory so that you don’t have to order far in advance.
Equipment: If new equipment is needed, consider leasing instead of buying to preserve liquidity. Leasing does not require down payments compared to many equipment loans. Or, negotiate 100% equipment finance with your bank.
Pricing: Increase pricing across the board, or with slow paying customers.
Shorten Operating Cycle per customer: Sometimes it can take over 30 days to order raw materials and manufacture these materials into an end product for a customer(s). If you add this order and manufacturing time to a customer that pays past 60 days, the time that you are out of cash can easily add up to 90 days or longer. Shorten this operating and payment cycle by requiring a more immediate form of payment from them, or consider terminating the relationship with slow customers. You may find the cost of carrying these types of customers are draining your profits.
Cash Flow Analysis:Put together a 13 week cash flow analysis. This is a rolling projection that changes with the performance of your business and helps you determine available cash on a 13 week basis. The cash flow analysis also helps you plan future cash needs, play with projections, and minimize/eliminate surprises.
Hopefully, this list has provided one or two items that you can tweak now to cut back on expenses an increase your cash flow. But remember these steps are really “goodcapitalhygiene”. The more familiar you are with these areas, the easier they are to maintain and leverage when you need to.
The above information was provided byRobbie Faucett, District Sales Manager for our Flexentdivision. If you’d like to discuss this further or have Robbie present to you and your team, please call 855-717-6400.
