Getting money in-house faster can help your business reduce costs and stabilize cash flow. After all, cash flow is the lifeblood of your business. Cutting the cash-recovery cycle means far more than just getting invoices out the door quickly and collecting the balances due within 30 days. The cash conversion cycle - which equals the number of days of accounts receivable, plus the number of days in inventory, minus the number of days payable - has three key areas that need to be addressed.
Accounts Receivable It would be great if every business could collect the money owed in the same fashion as retailers - when the product or service was purchased. In many companies, especially if you are selling business to business, that may not be possible. Think about creating a business model with subscription, maintenance or service plans which can effectively speed up collections and prevent payment problems.
If that's not possible, think about moving your
invoicing online, eliminating the time and expense it takes to print, assemble and mail invoices, as well as the delivery lag. Contact customers who are routinely late to find out why. This may uncover problems with the account, ranging from dissatisfaction to financial issues, which will enable your business to make better credit decisions in the future. Processes should also be put in place to issue invoices at the earliest possible opportunity after the order or completion of the order, depending on your invoicing policy.
Inventory Buying and warehousing inventory ties up cash and adds to your cash conversion cycle. Too many companies have "safety stock" to ensure that they have materials or products on hand when they need them. However, by converting to a build-to-order business model or taking advantage of suppliers' expedited delivery programs, your business could tie up less of your cash in inventory and reduce the amount of time your products and materials are sitting in a warehouse. In addition, you eliminate the risk of your stock having to be discounted or discarded because it can't be sold or it becomes obsolete.
Monitoring deliveries and fulfillment is also a critical element to speeding up receivables and keeping long-term customers. If you have deliveries that are not getting where they need to be on time or you have other problems, then you're just delaying the time it takes to invoice and collect payment.
Accounts Payable Inventory management directly correlates to the amount of money that goes out the door. You should assign a point of responsibility for monitoring orders to ensure that orders are correct in quantity and cost. Weight the benefits of keeping your own money in-house and paying invoices close to the due date against taking early-payment discounts. If you have the cash and forgo taking a 2% discount for payment in 10 days, that's the equivalent of financing that money at 36% per year.
Here's something to think about - what would happen if you put performance incentives in place for accounting personnel in your organization? This can be an additional incentive for your staff to collect money more quickly and to motivate them to uncover areas in their department and the other departments that are causing delays in receiving payment.
Performance Advisors can do an assessment of your accounting and office procedure system to uncover ways to reduce your cash conversion cycle. Contact Performance Advisors today at 602-579-5725 or email Performance Advisors today for assistance.
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