Yesterday we looked at some reasons for low or negative cash flow. A company with paid-up Debtors can still have low or negative cash flow. Here are some other aspects of your business to look at.
Yes, we’ve all seen the advert – how much Stock On Hand to you carry? Holding excessive stock is simply tying up funds, and again you have the compounding interest problem described in yesterday’s article. Review your stock levels and move more towards ‘Just In Time’.
Negotiate payment terms with your Suppliers that match your expected income pattern. For example if your Supplier allows 30 days to pay, and your firm has seven then the chances are that you can be paid in time to pay them. If the terms were the other way around then you are carrying interest costs for at least three weeks. (Of course you may also consider setting your own terms to be equal or less than the shortest terms your Suppliers offer).
Under what circumstances do you offer credit? Is there a minimum purchase expectation? What about a Credit Check? A simple procedure of asking for an introduction to two or three current businesses where the prospective Debtor already has an account will go a long way to reducing the Bad Debts before they get started (especially when you ring and ask about the history of on-time payments). You can also ask for proof that the referrer Company really exists – request some information (such as ABN or equivalent), the company website URL, or where you can see a current advert for the referrer business.
You can also encourage on-time or even early payment by offering incentives. That can be a discount for on-time payment or a gift of high perceived value and low cost (such as movie tickets assuming you buy in bulk). Offering a discount delivers $1 of benefit to your Debtor for $1 of cost to you. Offering a high perceived value gift can deliver $1 of benefit for maybe 50c cost to you. A gift can also be some of that slow-moving stock that nobody wants to actually pay for!
What hints, tips and tricks do you have that you would like to share that will help improve other’s cash flow?