Cash is king for a reason. Here’s how to monitor yours.
Cash is king for a reason. Here’s how to monitor yours.

 We often hear “cash is king” in business. Yet, too many businesses don’t monitor their cash position as well as they should. Without cash your business is in trouble. Sometimes it is possible to borrow, but going to the bank to borrow money when you are in difficult straits is the worst time. A far better solution is to monitor your cash flow, and take steps to take care of it before you are in crisis mode. Here are some steps to consider:

  • If you extend credit to your customers, you should always check their references beforehand. Ask for, and check, references. If it is a larger firm, you can run a credit check. If it is a smaller business, or a sole proprietor, you can check their individual credit. There is a cost to this, but it’s less expensive than having an uncollectable account.
  • If you extend credit, submit the invoice for payment the day you deliver or release the goods. If someone charges an order on the second of the month, don’t wait until the next month to send the bill. More and more companies send invoices either electronically or by fax to speed up payments; it’s a good practice. If some of your invoices are large, consider asking for progress payments. This is especially true if you are creating something customized for the individual client.
  • If you offer customers 30 days to pay, you might want to consider offering a discount for early payment. For instance, if you offer a 2% discount for payment within 10 days it can speed up the incoming cash. You can also state on the invoice you charge interest on accounts over 30 days. You then have the prompt-payment carrot and the late-payment stick.
  • Be sure to monitor your accounts receivable. If you have a new client, you might want to make a follow-up phone call a few days before payment is due to confirm that everything about the order was as expected. It also serves as a reminder. If a customer is over 30 days in making a payment, you need to call, as uncomfortable as that can be.
  • Another aspect to generating good cash flow is appropriate inventory. Some businesses carry excess inventory as a hedge. Too often that means inventory is not moving, which leaves you vulnerable to breakage and theft. Would you take an envelope of money and put it out in a warehouse and leave it there because you might need it? Move out the inventory that isn’t necessary. Mark it down, offer two for one, but convert it into cash you can use today.
  • The same is true of underused equipment. If you have equipment that you use once in a while, but it ties up a lot of cash, consider selling it and renting equipment when you need it.
  • While the steps outlined above help bring cash in, you must also be careful of the cash that goes out. Watch your debt structure. In today’s rate environment, there might be an opportunity to refinance obligations at a lower rate. This might mean extending the term, but if it means a much better cash flow it is worth considering
  • You might also consider talking to suppliers about extended terms, such as 60 days to pay rather than 30. If you have been a good account and have a strong relationship, they will want to keep you. But you need to explain that the arrangement is short-term and you will work to bring it back to 30 days as quickly as possible. If you are proactive on this and honest, your suppliers might help you.
  • Researching supplier alternatives also has potential. Is there a way you can consolidate suppliers to get better prices or terms? Even if it is only shipping costs, it could mean better cash flow.
  • The major point in all of this is to pay attention to your cash flow. If things are good, perhaps that means checking it monthly. If things are less than desirable, review it once a week. If things are really tight, look at it every day. Is it in line with your budget? Are you meeting sales goals? Do you need to generate more cash for a bill coming due?

Talk with the people you do business with — both your customers and your suppliers. Be professional and honest when it comes to payments. Your reputation and your company’s are at stake.

(This originally appeared in MaineBiz in October 2012)


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