When a business is struggling with its cash flow, the solution comes down to four simple words: Collect faster, pay slower.
It's a lot easier to make a solution sound simple than it is to carry it out. But it is possible, provided the business recognizes its financial situation and has a clear understanding of the strategies and tactics it must employ.
I'm writing from the perspective of a professional who deals regularly with troubled businesses, but companies that are not struggling now may also be able to benefit as well by adopting some of the ideas mentioned here.
The first step in the process is to do a cash reconciliation — figuring out how much money the business really has, including items that aren't showing up on bank statements. As we dig into the numbers, we also generate two other metrics: DSO, for days sales outstanding, which measures how long it takes the business to collect its receivables, and DPO, for days payables outstanding, which measures how long the company takes to make payments on its invoices.
Standards for DSO and DPO vary by industry, so the findings can help benchmark how well the business fares in comparison with its peers. More importantly, these measurements provide a good starting point for evaluating a company's overall situation. If payments are being made faster than collections, the business could find itself tight on cash, even if its projected income exceeds actual expenses.
By analyzing DSO and DPO we can begin looking for opportunities to improve the company's cash flow. It's not unusual to find procedural weaknesses that are contributing to the problems.
Let's look at the sales side first.
If cash is sitting with the company's customers for too long, the first step is to implement procedures to encourage them to pay more quickly.
For example, if payment on an invoice is due 30 days after it is issued, it is a good practice to call the customer after a week or 10 days, verify that the invoice was received, make sure that they have no questions about it and ask for confirmation that it will be paid by the due date. If no questions are raised, contact the customer again about a week before the payment is due to verify that it will be paid on time.
There's no need to worry about your diligence upsetting the customer. After all, you are only verifying that the customer will make payment according to terms to which he has already agreed. READ MORE
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