Business Basics: Manage Cash Flow to Keep Your Company Healthy

Many manufacturers and distributors are experiencing slower payments these days — a hangover from the recession that some larger customers have held on to. It’s not unusual for buyers to stretch their payments from 60 to 75 or even 90 days. This is certainly beneficial for them, but it can wreak havoc on your company’s cash flow.

In fact, poor cash flow is one of the main reasons businesses struggle. Being smart about the movement of cash into and out of your business ensures flexibility and the ability to grow.

Consider these seven tips to help you optimize your company’s cash flow:

1. Know your receivables.

Your accounting department must know the status of each invoice and have a standard procedure to resolve receivables issues quickly. Don’t let the collection process slip: Make collection calls promptly and systematically, with frequent follow up. (Note that adherence to a credit policy on the front end may minimize the need for collection efforts on the back end.)

Consider offering discounts for early payment — a 2/10, net-30 discount is common, in which a 2 percent discount is offered for payment in 10 instead of 30 days.

2. Negotiate with your customers.

Sometimes customers will give their suppliers advance notice that they are changing payment terms and lengthening their payment schedule. It’s reasonable to negotiate with them. If they propose 90 days, for example, can you get them down to 75 days?

Also examine your pricing. You might be able to increase your prices to cover the increased costs of carrying extra days of receivables.

3. Be timely and accurate.

Fast and accurate billing helps accelerate your cash conversion cycle by minimizing short and slow payments due to unexpected reconciliation problems.

Also try to time your shipments to optimize invoicing. For example, if you can ship on the 30th and bill on the 1st, you’re in a much better cash position than if you ship on the 1st and have to wait until the 30th to bill your customer.

4. Sharpen inventory management.

One of the biggest drains on a manufacturing company’s cash is its inventory. Can you move toward a “just in time” manufacturing model to keep cash flow fluid?

Also consider your purchasing policies and controls. Be sure your purchasing team is practicing restraint by not overbuying.

5. Scour your accounts payable.

This is usually a good place to look to boost cash flow. Are you taking full advantage of suppliers’ payment terms by not paying invoices too early? Can you negotiate terms with your vendors that mirror or are more favorable than your payment terms with your customers?

6. Consider increasing your line of credit.

A good relationship with your bank is critically important, especially when cash is tight. Share the steps you’re taking to manage and increase your cash flow. If you are trying to grow your business, more credit may be necessary.

A word of caution: Determine how your accounting system ages your accounts receivable — by invoice date or due date. Banks sometimes won’t lend on accounts receivable past 90 days, or will lend a reduced amount on accounts receivable past 60 days. You should negotiate and compensate for this in your loan request.

7. Use faster payment options.

Use your bank’s lockbox services or a check scanner to get checks deposited faster, or give your customers the option to pay using electronic funds transfer (EFT). A lockbox and check scan will shorten the time from receipt of checks to deposit of funds into your account, while EFT shortens the time frame and eliminates paper checks altogether.

Finally, make sure your executive team is aware of the importance of cash flow management. Let them know how they can contribute to strengthening your company’s cash flow.

We are familiar with cash flow management techniques and can help you discover ways to improve your cash flow.

About the Authors

Cindy S. Johnson
Cindy S. Johnson
Partner Emeritus, Assurance and Advisory


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