Tune up your cash flow management

Good cash flow management is critical for any business, no matter how well-established or profitable. It’s also an area where many companies struggle. In a recent Intuit study, nearly 7 in 10 owners said cash flow concerns have kept them up at night. More than half said they’ve lost $10,000 or more from having to forgo a project or sales because of insufficient cash flow.

Savvy business owners continually refine their tactics to optimize their cash flow. Review the following tips and consider adjustments you might make to your current practices.

Companies of all sizes hinder cash flow by taking too long to collect. If you invoice for any portion of your sales, adopting speedy and consistent collections practices is one of the easiest fixes.

Measure how efficiently you currently collect by calculating the average number of days that it takes to collect payment after a sale, called days sales outstanding (DSO). Do this by dividing the value of your accounts receivable by the value of your credit sales for the same period. Then, multiply the result by the number of days in the period. For example, if the value of your accounts receivable for the month of June is $25,000 and your total credit sales are $30,000, your DSO would be 25 ($25,000 ÷ $30,000 x 30).

Generally speaking, a DSO of fewer than 45 days is considered good. Talk with your business banker or accountant about the optimal time frame for your company.

A weak DSO may prompt you to look at your collections practices to see where you might make improvements. Yet even if you’re collecting efficiently, there still may be points within your process that could be tightened. Ask yourself:

• Do you invoice customers promptly? Billing right after a project is completed or an order has shipped — or even including the bill with the finished product or order — may spur quicker payment, since your work is top of mind.
• Are invoicing details correct? Establish or refine your system for gathering complete and accurate customer data, including a schedule for updating this information over time. Missing or inaccurate details on an invoice may lead recipients to ignore them.
• Is it easy for customers to pay? Providing a range of payment options lets customers pay in the manner that’s most convenient for them. Accepting credit cards, PayPal, and checks (paired with a remote deposit service) can also reduce payment processing times.
• Do you follow up on late payments? The longer a payment is overdue, the less likely it is to be collected. Reach out to customers as soon as a payment is late.

Good cash flow calculations can identify issues while you have time to act. If you don’t routinely create these projections, ask your bookkeeper or accountant to build them for you. You can also lean on software: For instance, QuickBooks includes simple cash flow forecasting features, while apps such as Float and Pulse integrate with bookkeeping software to quickly build projections.

Aim to make your forecasts as accurate as possible. If you’re planning a particularly large inventory purchase, or your product pricing has changed, modify your figures accordingly. Set a time of the week or month to create or review your forecasts. In addition to helping with cash management, these reports highlight trends that can help you stay in the black.

Astute cash managers know that timing is everything. Consider scheduling payments strategically to keep cash in house for as long as possible. Also consider the forms of payment you use. Switching from check to credit card provides a float you can use for purchases while you’re waiting to be paid. Credit also has the benefit of less time and expense than paying by check.

Of course, you have to carefully manage your timing to be sure that payments are made on time. Also, weigh the benefits of stretching out payments against the value of early payment discounts, if offered. Your accountant or business banker may be able to provide guidance.

Expenses have a way of creeping up and can impact cash flow if left unchecked. At least once a year, review vendor contracts and expenses. Meet with your insurance broker to review your business insurance requirements, and have them shop around for the best rate. Comparison-shop for office supplies to be sure you're getting the best possible pricing on the items you use. Consider whether you need everything you currently invest in — for example, check for subscriptions, services, or devices you no longer use.

If it's been some time since you've increased prices, or if conditions warrant an increase, consider taking this step. Most customers will likely accept the change as a normal part of doing business. Know what your competitors are charging and how the value of your offering compares. Be prepared to explain the reason for the increase — for example, perhaps inventory costs have risen, or you've recently invested in process changes that will improve your offerings.

Citizens can help with your cash flow management needs. Find out how our cash management services can make your day-to-day operations run smoothly, or contact us to get started

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