Control Cash Flow

Best Practices to Untie Your Business's Cash

If you have a profitable business, congratulations!  You have passed one of the most basic tests of financial viability. Unfortunately, profits and positive cash flow don’t always go together.  Slow-paying customers, large seasonal swings in revenues, significant one-time expenses or increases in inventory due to growth can mean that your profitable business produces little or no cash.

To alleviate your cash challenges, look for sources of locked-up cash:

  • Financing customers and suppliers
  • Payroll expenses
  • Expenses and overhead
  • Inventory carrying costs
  • Purchasing materials

Use the following measures to control cash hogs with improved control, better tracking and management of cash flows.   

Financing customers and suppliers

Even though your profit margins may look good, your cash may be hiding in receivables and financing your customers’ businesses, not yours.  In addition to tying up cash, you could be missing discounts or incurring penalties /or late fees for slow payment of supplier invoicing.  Consider the following best practices to balance out payment terms and conditions while building a stronger cash base and cash flow.

Customer financing

  • Find the shortest payment terms you can extend to your customers without putting yourself at a competitive disadvantage. if you allow your customers 60 days to pay their bills, you are essentially giving them a 60-day loan. Consider negotiating partial-progress payments or down payments for larger jobs or orders.
  • Provide discounts or other incentives for fast payment via Internet, electronic or debit card payment, or scheduled electronic payments using online bill payment or Automated Clearing House (ACH) transactions.
  • Automate collections to save time and resources when billing, collecting, depositing, and tracking receivables. Automating the collection process has the potential to shrink your cash flow cycle by days or weeks.

Supplier financing

  • Negotiate with suppliers for better pricing, longer payment terms and invoice discounting.
  • Pay vendors and suppliers electronically to control and schedule when you pay, ensure you meet your payment terms, help you qualify for supplier discounts and to avoid penalties. Electronic payments also reduce processing time, increase timeliness and accuracy, and streamlines reporting.
  • Consider paying with credit cards for more payment flexibility.

Payroll expenses

Labor costs vary greatly by industry but often figure as a prominent expense category. Streamlining payroll processes as well as looking at alternative employment strategies can minimize the labor cost impact on your bottom line.

  • Convert to an online payroll system that will streamline, organize, and standardize your recurring wage payouts. Online payroll systems save your company money with paperless payments, as well as freeing up employee work hours for other strategic projects.
  • Instead of hiring employees and paying full-time salary and benefits, consider outsourcing portions of your operations to professional freelancers or contractors who have already developed the skills you need for tasks.This practice may also save the business training costs. 
  • Make the most of your employees and minimize their downtime. Identify positions that could handle additional tasks, and then have the current employees do jobs that would otherwise require hiring an additional person.
  • Use incentives other than base salary and wages.  Bonuses and incentive compensation allow you to tie compensation to business goal attainment. Consider non-payment incentives such special recognition, extra time off, etc.

Expense and overhead

While fixed costs, such as rent, equipment, marketing or utilities, are a constant, they do not have to be cash hogs.  Once you have determined what costs go toward overhead and which costs are production-related, you can use the best practices below to help reduce recurring expenses and improve cash flow.

  • Do not underestimate the knowledge of your employees.  Get everyone involved to review overhead costs, using their experience to identify areas that can be reduced or eliminated.
  • Automate functions such as HR, payroll and purchasing. Electronic systems available today tighten controls, allow for transparency in spending patterns and can help regulate the speed and timeliness of necessary payables.
  • Transition to a paperless office by conducting more business electronically.  Relying less on paper saves the obvious expenses - less paper, toner, ink cartridges, copying and printing machinery maintenance/upkeep - but also storage and filing space, possibly allowing you to downsize your office facility or utilize the newly available space to support more profit-generating tasks.
  • Take advantage of new technologies (VoIP based systems could save up to 50 percent on equipment costs) and consider leasing versus buying to save on future upgrades and monthly holding costs.

Instituting a work-from-home program for employees can reduce the number of employees physically in the office. This practice can enable your business to reduce its on-premises space, thus reducing expenses such as lease or rent payments and utility costs.

Inventory carrying costs

Businesses supplying hard goods - whether finished products, components or raw materials - can improve cash flow and realize savings by taking a hard look at the four main components of carrying costs: Capital, storage space, inventory service and inventory risk costs.   

  • Renegotiating financing used to purchase inventory can save interest expense and lower the value percentage of inventory, refining capital cost.
  • Optimizing your warehouse layout to utilize narrow aisle equipment maximizes the efficiency of your storage space, allowing more product to be stored in smaller areas.  Installing technology to identify/locate materials or products also speeds logistics and helps move product in and out of the warehouse more quickly. 
  • Service costs, typically insurance and taxes paid on inventory, can be reduced by implementing a Just-In-Time (JIT) inventory system.  By accurately forecasting demand, factoring in one-time events and seasonality, then ordering/receiving goods only when needed, companies can reduce inventory levels, decrease waste and thus lower service cost.
  • Understanding and managing turns in inventory will minimize costs associated with risk by ensuring inventory does not become obsolete, damaged or stolen. The longer you inventory sits, the more cash is tied up. It follows that smaller inventory levels, turned quickly, will generate more cash for your business.

Purchasing materials

Matching the quality of your product with the market’s needs and your company’s positioning generally leads to market success.  Without resorting to strategies that threaten your product’s value, the strategies below can help optimize your purchasing and sourcing.

  • Consider bidding out existing contracts to create competition among vendors.  You may find that you can obtain the same high quality materials you need at a much more favorable price and/or payment plan.  Remember, everything is negotiable. 
  • Purchasing in bulk typically offers businesses the opportunity to take advantage of discounted pricing, which saves on materials, and can be factored into inventory carrying cost savings as well. 

Look good on paper and in cash

Implementing cost saving strategies and simple automation tasks can help with managing your cash flow and unlocking tied up cash.  While this can feel a bit overwhelming, you don’t have to go it alone.  Relying on your partners - like your accountant, your banker or other business advisor - for help is always a winning strategy and a source of new ideas.  Finding tied up cash by accelerating your cash cycles with automated AP functions, negotiated contracts and terms, electronic transactions and payments as well as ongoing monitoring and transparency will help ensure your business has cash available when and where you need it.

 

This content does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.

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