6 WAYS TO IMPROVE YOUR CASH FLOW

Collecting what you are owed is one thing every business must remember to do in order to maintain success. Even when sales are great, many companies fail due to poor cash flow. As Nolan Bushnell, founder of Atari and Chuck E. Cheese, likes to say, “A sale is a gift to the customer until the money is in the bank.” Despite it hurting them the most, small businesses often take the hardest hits in accounts receivable. For example, big-box retailers stretch their payment terms to smaller vendors and suppliers for up to 90 or even 120 days. Other companies make paying their bills late a matter of course. If terms are net-30 days, for example, they might not pay until day 45 or later, or if payment is due in 45 days, they might stretch out the payment to 60 days or longer. It’s imperative that you make collecting your money a top priority not only in your accounting department but company-wide. Bring your financial, accounting, sales and other departments together to come up with a comprehensive strategy that maximizes collections on your accounts receivable. Then you should execute the five strategies outlined below.

1. Create an aging report.

Determine the payment status of all your accounts receivable by creating accounts receivable (A/R) aging report, which tracks and measures what your customers owe. Each account is broken down by the number of days since the invoice was issued (such as 0-30 days, 31-60, 61-90 days, and beyond 90 days) and the amounts due, which helps in catching collection issues early.

2. Aggressively invoice.

A few days before a payment is due, contact your client and/or their accounting department to make sure they have everything they need to make their payment, especially if the invoice is a big one. This also conveniently works as a polite reminde that payment is due.

3. Make paying easy.

There are things you can do when you invoice clients to make it easier for them to pay. To start, make sure your invoices are clear and complete and include any information that, if missing, might cause your client’s accounting department to request further review. You can also do things like include a prestamped envelope if you accept checks.

4. Move quickly on money that’s past due.

The longer money owed goes uncollected, the less likely it’ll ever be collected, either in part or in full, according to studies. Therefore, you should call or email clients the very first day the payment is late, if not earlier, to remind them that the payment deadline is fast approaching. You can start with a gentle reminder, which is usually enough to prompt most clients to cough up the cash right away. If not, you’ll need to send out firmer communications, including letters informing clients that legal action may commence if the payment isn’t received by a certain deadline.

5. Offer an early payment discount.

You can do things like offer customers a 2 percent discount if they pay within 10 instead of 30 days, which incentivizes them to pay quickly at little cost to you and may be cheaper for you in the long run if you can avoid stressful, lengthy communications and wasting employee time.

6. Offer payment plans.

If you have clients who have cash flow challenges of their own, you should offer a payment plan quickly. That way, you collect your money without jeopardizing your business relationship. When you make the plan, put the terms in writing, have both parties sign and make sure all future sales are collected on delivery until the late amount is paid in full.

7. Use cash-management tools.

Banks offer a wide range of cash-management services that improve collections and cash-flow cycles. For example, a wholesale lockbox allows customers to mail checks to a special post office box monitored by the bank, which then collects and deposits them directly. In addition, electronic payments can be made available through tools such as the Automated Clearing House (ACH). The foregoing information is provided as a courtesy of City National Bank (CNB). Unless otherwise stated, opinions expressed are those of the respective authors and not necessarily those of CNB. The information is provided without warranty and no recommendation or endorsement by CNB is intended or should be inferred unless specifically stated.