What you need to know about your business' cashflow (Part 2)

In my previous article, I talked about what can happen to your cashflow if your customers take to long to pay you, or if it takes too long to sell you your goods or provide your service. Now I will offer come insight into what you can do to free up this cash flow.

But first, I would like to chunk down the idea of working capital for you. Working capital is comprised of three key elements:

• Accounts Receivable / Debtors (People that owe you money)
• Accounts Payable / Creditors (People that you own money)
• Inventor / Work in Progress (The goods or services you sell to make money)

Now that we've got that out of the way, the following offers some tips for each of these key areas.

• Accounts Receivable:
• Ensure you issue your invoice promptly: This is probably the easiest thing to control and a prime contributor to lock-down.You've got to get in while its still in your customer's mind how good the product or service was.
• Send invoices by email as well as post: This will save you a day of postage and will make doubly sure that the invoice hits its target.
• Make sure your invoice is clear, concise and accurately spells out the terms of payment: This will ensure that there is no ambiguity to the terms of the contract.
• Make paying the invoice easy, provide different payment options: Now I'm not saying that you need to rush out and sign up for BPay or credit card merchant facilities. It however make sense to offer a cheque and an electronic funds transfer option to allow them to deposit straight into your bank. Most people have internet banking and this will save you visiting the bank to deposit cheques.
• Follow up immediately with invoices that exceed terms: Most of the time your invoice has been mixed up in a pile of paperwork, or simply forgotten about. A gentle reminder to your customer can go a long way to getting you paid sooner.
• Don't offer credit to everyone: Business credit is basically like a loan, would you lend money to anyone off the street? Then you probably shouldn't give credit to anyone off the street. Credit should be earned through a good working relationship or a good reputation.
• Ask for credit references: Many big businesses will provide you with a form that needs to be completed in order to obtain credit terms. This form will ask you to provide the details of suppliers you currently have credit terms with; the company will then follow up with these companies and assess your credit worthiness.
• Ask for deposits: If you ask for proportion of the payment upfront before the delivery of the goods or service, you'll have at least covered some of your costs while you're waiting for the invoice to be paid.
• Ask for the money up front or cash on delivery: It's a bold thing to say I know, but you don't walk out of the grocery store with a trolley full of food and pay 30 days later, so why should you business be any different. I know business to business credit is almost expected these days, but it is at least worth investigating this option. It will essentially resolve all your cash flow problems.
• Accounts Payable
• Get organised: keep all the bills in one place, get them onto your accounting software as soon as they come in.
• Creditor scheduling: It pays to know who you have to pay and when you have to pay them by. It will help you plan and manage your cashflow better.
• Strategic release of creditors: Find out what the due date is and pay on the absolute last day. This cash can be used for working capital in the meantime.
• Tell the supplier if you're having trouble paying: If you believe that you're not going to be able to pay your creditors in time, call them before they call you. Explain the situation, they will understand because all businesses have been there. It will go a long way to preserving your relationship with your suppliers.
• Prioritise your creditors: If you have to juggle your bills; figure out which bills are a higher priority and pay them first. There's no point paying your stationery company first if your electricity is about to get cut off.
• Inventory
• Don't order too much (or too little): Inventory management is a delicate balancing act. Order too much and you've forked out good money for stock that's going to be hanging around for a long time. Order too little and you're stuck with stock-outs that are going to cost you business and cause you administrative headaches. The trick is finding just the right amount to order to keep things ticking over. If you're concerned ask your accountant about economic order qunatities and inventory management.
• Plan ahead: Spend a little more time considering your inventory needs for the month, this can go along way for getting your inventory levels right.
• First in, first out: Stock that came in first should be going out the door before more recent additions are sold. Don't promote new stock, if you can move the old stock first.
• Get it done quicker: For all those in the service sector, you need to understand that the sooner the job is done, the sooner you get paid. So get it done quicker. If it means you get paid quicker; try and look for "quick wins" the smaller profitable jobs and prioritise them over your slower projects.

Well I hope these tips help you out with your cashflow management.

Chris Hooper
(Shut Up and Save)