Up Your Cash!

To continue the cash flow discussion from last week.  Predicting cash flow is one of the most difficult thing small and medium size company do.  Last week we looked at a tool which can dramatically help predicting cash flow – the 13 Week Cash Flow Worksheet.  I hope you put this tool to use and continue using it on a weekly basis. 

Now, the question is – how can I improve my business’ cash flow?

There are many techniques and strategies to improve cash flow and many are dependent on your business.  The following are 7 best ways to Up Your Cash:

1. Negotiate better terms with your vendors – payment terms of 40 days vs. 30 days significantly enhances cash flow – a business with vendor related costs of $14mm that extends the average days to pay from 30 to 40 days enhances cash flow by $400,000!
2. Get some cash down up front - This is a great way to have your clients fund projects - not you. 
3. Be careful with your payment terms with customers – balance due on completion is much better than 30 day terms.  If you do extend credit terms, be diligent in your collection practices.  Even slight improvements in day’s sales outstanding (DSO) can be a significant enhancement to cash flow.  If you are a $20mm business with $2.2mm in accounts receivable, a 5-day improvement means a $274,000 incremental increase in cash flow.  Ensure you invoice your customers quickly and develop a credit management strategy and process focuses on reducing DSO.  I recently worked with a client that took a week to invoice their customers.  Employing a couple simple strategies (immediate invoicing, emailing/faxing invoices vs. mailing, and accepting ACH payments vs. customer checks) improved cash flow by over $200,000.  Simple and effective.
4. Manage your inventory better – the same principal as DSO and average days to pay applies to days of inventory on hand.  Any improvement here has serious implications to improve cash flow.
5. Watch your operating expenses.  For most businesses, the most significant operating expense is payroll and payroll related cost, but carefully watching all expenses is imperative.  Any improvement directly enhances cash flow.
6. Use a line of credit at the bank to plug any shortfall of cash flow and allow you to take advantage of vendor programs. Remember taking advantage of quick pay discounts is an excellent way to leverage your cash flow to enhance profitability.  Taking advantage of a 2%10, net 30 discount returns approximately 37% – so it may make sense to tap your line of credit occasionally to take advantage of the vendor discount. 
   
   
   Use the following formula to calculate the cost of not taking a discount.
   
   
   Cost of failing =          Discount %                   X   360
   to take discount          100% - Discount %       Final due date - Discount period
   
   
   So, in the 2%10, net 30 example above the calculation looks like this: .02/.98x360/20 = 37%.  That’s a lot to give up by paying in 30 days instead of 10.
7. Watch what you take out of the business.  Shareholders use the business to pay business related and other expenses, but anything you take out directly reduces cash.

Additional cash generated by using the above techniques can be used to grow the business, to paydown debt, or to take advantage of quick pay vendor discounts.  

Well, have a great Easter, and I hope you are able to spend some time with your family.

And as always – Think Cash Flow!

/jon