10 tips for managing your cash flow

Cash flow problems cause more businesses to fail than anything else, which is a sobering thought when you consider the sorts of challenges that IT channel companies currently face. Here are 10 key tips for keeping on top of cash flow.

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10 tips for managing your cash flow
By  Andrew Seymour Published  August 4, 2010

5. Beware the dangers of slashing prices

The first thing most companies attempt to do to solve a cash flow problem is boost sales. Bundle deals, special incentives or just straight price reductions are all methods that can be used to bring in cash quickly if the demand is there. But you need to exercise caution, warns Whitcroft, because success boils down to understanding the trade-offs you are making: “Your cash flow crisis may be so bad that you have to lose a lot of money to turn it into cash and then hope you can make the profits back later to stay in business. But you have really got to drill down and ask yourself, ‘what can I afford to lose, how much can I afford to drop the price to get the cash, and what are the problems if I don’t get the cash in?’”

4. Get the money you are owed

One area that many companies fail to consider when they face a cash flow issue is accelerating collections for sales already made. Whitcroft says firms shouldn’t be afraid of upsetting customers if there is not a valid reason why payments are delayed. “Go and get your money because that is money you are owed!” he says. “You then have to ask yourself if that customer is somebody you want to continue doing business with because if they don’t have a good reason for delaying payment then they shouldn’t be doing it.” He suggests it can also be worthwhile to get senior executives from your organisation involved as well. “If you have got a creditors clerk talking to a debtors clerk, they are dealing from opposite ends of the pack in so much as one is paid to delay payments and the other is paid to accelerate them,” says Whitcroft. “Sometimes what you need to do is get the senior executives of your business talking to the senior executives of your creditors.”

3. Address the excuses before they arise

If there are hold-ups in payments then you need to get the reasons for delay off the table as quickly as possible. Whitcroft says a common problem in the Middle East is that sales are done on an invoice basis rather than a statement basis (such as 30 days from invoice paid weekly) and this often means companies don’t begin chasing their money until the payment is due. That, however, is when the customer excuses usually start. He advises credit controllers to get in touch with customers at least two weeks before due date to build in time for any queries. Alternatively, incorporate cash discounts into your pricing structure cash to encourage prompt payment. “You have to make that discount more attractive than what your customer would get from the bank, but if you look at the opportunity cost of accelerating your cash-to-cash cycle then you should more than make up for it. You should try to push for a good percentage of your business to be on either very short payment terms or cash,” suggests Whitcroft.

2. Honesty is the best policy

If you are struggling to get cash in from customers then see if you can extend payments to your own suppliers or get a short-term loan from the bank. Just make sure it is carefully managed though because repeated delays or a failure to make any payments at all will very quickly destroy your company’s credibility. Whitcroft insists it is far better to be transparent with stakeholders and come clean about your cash flow challenges. “Be honest and work with your suppliers because it is in their interests that you stay in business,” he says. “What is more likely to break the relationship is you being dishonest about when and what you can pay. Far too often here I have seen people muddying the waters by not wanting to admit they have a cash flow problem, and that just causes breaks in relationships.”

1. Make staff aware that cash flow is king

Have people at all levels in all departments of your business tied to incentives that reward the right behaviour. Don’t just pay sales people for revenue, make sure you are paying them on the profitability of your business and the payment terms they are realising. Make sure product managers are being paid on inventory levels and credit controllers on keeping DSO down. Even consider things like paying your drivers for on-time deliveries because if that makes your customers happy then they will be more inclined to pay you. “You should be paying for performance from the receptionist to credit control to product managers to sales - all the way up the line,” says Whitcroft. “Remember that turnover is ego, profit is real, but cash flow is king.”

3204 days ago
Mukul Shyam

Well written ! Cash flow is King !

3206 days ago
CEO

Right on. Mr. Whitcroft nailed it couldn't agree more. Brilliant article and great tips. Very impressive indeed.

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