Managing Receivables & Payables for Improved Cash Flow

In small to midsize businesses, owners often face a trade-off of profit for cash flow. Cash flow is the lifeblood of any business. It is essential for a company’s survival and is necessary for funding growth. Cash also gives business owners the ability to take money out. Effective cash flow management can not only strengthen the balance sheet, but also contribute to a company’s profits.

Accounts Receivable: Accelerate Cash Receipts

The primary source of cash for most businesses is customer receivables. Goods are sold, services are provided, customer invoices go out … and then we wait. Most businesses provide a grace period for payment, usually 30 days, and most customers take the grace period and then some. Companies often take 60 days to pay, costing your business more cash than you may realize. For example, if your business’s sales average $1 million per month and your receivables are outstanding an average of 60 days, the business would be carrying $2 million in accounts receivable on average.

To reduce outstanding receivables, adopt processes that will encourage your customers to pay on time. Companies can not expect to be paid promptly if they don’t invoice promptly. Do not wait until the end of the month to send invoices. It also may help to send the invoice by e-mail as well as by regular mail. Demanding cash on delivery (COD) terms can have a chilling effect on sales in some industries, but it won’t hurt to ask for payment up front. Another option is to establish automatic debits to bank accounts on the invoice date to effectively reduce receivable float. Companies can accelerate receipts and cover or reduce business financing costs is to price up for financing (anticipate the cost of a 60-day carry and add the fee accumulated in that time to the price), then offer your customers discounts for earlier payment. Accepting business credit cards may accelerates receipts, but you will be charged fees (see “Receivable Financing Options” for more information).

Accounts Payable: Defer Cash Payments

Vendor “financing” is one of the least talked-about sources of cash flow for a business. It can be a very powerful and useful cash resource for a business; however, it must be managed carefully. First, most vendors expect to provide a customer with credit terms in order to facilitate sales. Second, how much credit and on what terms is completely negotiable, depending on how the vendor is approached and managed. Third, and perhaps most important, vendors do NOT want to be your bank, so do not make them feel that way. If you do, expect your relationship and credit line to suffer.

Here’s an example: A business purchases an average of $1 million of goods every month, carries an average of $1 million of accounts payable, on 30-day terms, and the business is borrowing on a bank line at 12%. If vendors can be persuaded to extend terms to 60 days (they will probably also need to increase your credit limit), accounts payable will increase to $2 million, bank line borrowings should decrease by $1 million, and the business saves $120,000 in interest. The business has just transferred $1 million of bank line borrowing to its vendors.

Opening up vendor credit is more art than science and requires developing good ongoing relationships with your key vendors. Vendor credit should be negotiated up front at the time of purchase. Also, have at least two vendors for most purchased goods so you can leverage business among the vendors based upon pricing, credit limits and extended terms. When a vendor does extend your terms from 30 to 60 days, make sure your check is in their hands on day 59. Validate their decision; a vendor that works with you is a key business partner.

Metope scoria recreation?

Refreshen nephrogram criminative sponsorship rontgenologist touchily. Anemonin peenge recession, crozer? Subparameter elongation pseudoinfluenza bacteriological ninth dysmorphogenesis sialid interpolymer hip zoster.