Friday, November 5, 2010

How to Improve Cash Flow in Ninety Days

8:22 AM | ,

When it comes to business, cash is king. Managing your business’s cash is one of the most important activities of an entrepreneur and small business owner. Most start-up businesses that fail do so because of a shortage of cash. In most turnaround situations, the very first problem that needs to be addressed is related to cash– working capital. Without cash, how can you market? And, without marketing there can be no improvement in revenue.
Depending on the situation, there may be several ways to secure cash. Possibly if you have a solid long-term plan you can secure a loan or convince people to invest in your business. However this can take some time to complete. And some entrepreneurs do not have the luxury of time. They need to raise cash quickly.
As an individual who has been involved in managing cash and turning companies around, I would like to share some techniques which can improve your cash flow in just 90 days. These techniques are not theories. They are tried and proven by many turnaround specialists.

Accounts Payable – There are certain payables that must be paid in a timely manner (when due) if you don’t want to sink the company and get in legal trouble. An example is payroll, final wages and vacation time (in most states). However, there are others that can be delayed and paid late. In fact, some can be done with no negative impact to your credit rating. For example, if you have been a good paying account with your vendors in the past, chances are you can persuade them to extend the due date another 2-6 weeks out every month for 90+ days.
I have been amazed at what some creditors are willing to do when you are upfront and communicate with them. The key here is that they must believe they will get paid and continue to do business with you. If you avoid your creditors and do not promptly return their calls, they loose that level of confidence and don’t want to make the situation worse from their standpoint by letting you get in deeper.

Accounts Receivable – Then there are those who owe you money. Of course, you do not want to have policies that drive customers away. However, on the other hand you do not want to deliver products and/or services for which you will never be paid. So the first thing to do is draw a line between current customers and future customers. What will your credit policy be for “new” customers? Here are some potential ideas:
  1. Conduct credit checks
  2. Require cash for a term until the account is well established
  3. Require deposit (25%-50%) until the account is well established
  4. Expedite the due date
  5. Offer discount if paid in xx days (possibly increase prices to cover discount)
  6. Review collection activities and step up procedures (personal phone calls and visits from small business owner helps)
Now it is time to look at your current customers and through personal visits and negotiations consider implementing the new procedures you have created to existing customers.
Invoice Factoring – Shop financial institutions for the best factoring rates and guarantees.  For those who may not know, factoring is a financial transaction whereby a business sells its accounts receivable to a third party at a discount in exchange for immediate money with which to finance continued business. The older the invoice the higher this discount rate. If you can secure an acceptable discount rate, this can pump immediate cash into your business. Again, it may be possible to raise your prices enough to cover part, or all, of this discount. If this option is of interest, you can research it on the web by search for factoring and factoring companies.

Inventory – If you are marketing products that require inventory or manufacturing that requires raw materials, is it possible to operate with a smaller inventory of product or raw materials? Inventory can tie up a lot of cash if not managed correctly. Look at obsolete products/materials that can be liquidated at a discount if necessary, and convert these to cash.
These are a few things you can do to impact cash flow on a short-term basis. Of course, on a long-term basis, you will need to fine-tune your marketing strategy to improve cash flow. This is key since I don’t know of any way to “save” your way to success as there are only so many expenses you can reduce. However, there is unlimited revenue growth potential through a sound strategic marketing plan. Doing nothing or hoping is not a plan. What is your plan?
If you are just now starting a new business, why not get off the ground right by implementing these strategies in the beginning?

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