Source: Jeff Wright, Senior Vice President, Hennessey Capital
Managing cash flow vs profit is key to the success of any business. Without it, management cannot operate efficiently to address the needs of its customers and take advantage of new opportunities.
Listed below are six ways to improve cash flow:
1 . Manage your receivables
- Before you sell to a new customer, do your homework. Order credit reports, check credit references, ask others who may have some experience with the customer. You may want to sell on C.O.D. until you have some payment history before extending terms.
- Have a policy in place to follow up for collection of outstanding receivables. Staying in contact with customers is critical. Initiate calls to ensure the customer has received the product or service, call once the invoice goes past due and execute a follow up call for payment status. Also, send letters requesting payment if the invoice starts to stretch. If all else fails, get the attorneys involved early. The squeaky wheel does get the grease. Improving turnover days can significantly help cash flow.
- Offer discounts if they pay early. This offers a win-win for both parties. The customer saves money and you get cash sooner for other expenses reducing the need to borrow from your bank and paying interest costs.
- Make paying easier. Allow the customer to pay with a credit card or with electronic payment.
- Invoice promptly. Once the product is delivered or the service is provided, send your invoice. Have purchase orders and shipping evidence or time sheets signed to support the invoice.
2. Control inventory
- Negotiate better terms with suppliers. Shop around for suppliers that offer better pricing and extended terms without giving up quality.
- Only order materials for jobs for which you have purchase orders and not for jobs you may get. Inventory can tie up a significant amount of cash.
- If cash is tight, negotiate with your customer to supply the material. While you may sacrifice some profit margin on the marked up inventory, it requires no out lay of cash.
- Offer slow moving or obsolete inventory at a discount to generate cash.
- Offer to return slow moving inventory back to supplier in return for material you need.
- Have a perpetual inventory system in place to manage the inventory you have on hand.
3. Sell idle equipment
4. Review operating procedures
- Are all levels of management and employees communicating effectively? Breakdowns in communication can lead to quality and customer service issues that can result in increased material and labor costs not to mention dissatisfied customers.
- Does your facility’s floor plan allow for efficient movement of material and employee safety? Consultants who specialize in Sigma Six analysis can frequently pay for themselves through the costs savings they implement.
- IT systems must be in place to provide timely, accurate
reporting for management to make decisions.
5. Constant review of operating expenses
- Review your insurance policies for acceptable coverage. Negotiate better rates without giving up the protection you need.
- Negotiate better terms on your rent. With the number of vacant buildings around, landlords may be more willing to accept less to keep the building occupied and generating income.
- Review employee benefit plans. Benefits are a significant cash item on your profit and loss statement. If necessary, have the employees share some of the cost.
- Hire competent outside professionals. A good CPA can provide tax advice to save cash.
- Manage labor cost. Labor is one of, if not the largest, expense item. Review job responsibilities. Is overtime necessary or do you need to bring on additional staff? Can you use temporary staffing to fill a need at lower wages and no benefits?
- Are marketing dollars being spent wisely? Are they generating qualified leads and new business and strengthening your brand name?
6. Assess lending relationship
- Does you lender provide support and flexibility to meet your cash needs?
- Review your loan documents. Do you have a contract that requires you to stay in the relationship for a period of time and pay an exit fee if you leave early? Shop around with other lenders for better rates and terms.
Understanding and improving the conversion cycle from the time materials come into the plant until the receivable is collected is critical to improving cash flow. Use cash flow forecasting to monitor cash needs and assess unfavorable trends.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance LLC has offices throughout the southeast including Charlotte, Raleigh/Durham, Greensboro, Wilmington, Washington D.C. and South Florida with a team of more than 30 professionals serving more than 100 companies throughout the region.