One of the keys to successful cash flow management is to improve the speed of receivables. If you ignore this factor and don’t attempt to implement strategies to improve the speed of receivables, the amount of cash for day-to-day operations is reduced, which has the potential to lead to problems in payables. This isn’t a place where you want to be because it can lead to payroll and credit problems. In regards to the former, employees who aren’t paid on time are likely to sense danger and begin looking for another job. In regards to the latter, a decline in credit worthiness can lead to higher interest rates, which you want to avoid because it will increase costs.
Almost every business will come upon a time where there’s a cash flow dilemma. Even if your business never has cash flow problems, there can still be room for improvement. If you improve cash flow from receivables, your business will have more money for day-to-day operations and innovation. Innovation is the biggest driver of top-line growth. (For more, see: Why Cash Management is Key to Business Success.)
Ways to Improve
Here are 10 ways to improve cash flow from receivables.
Offer discounts to customers who pay early — This is the simplest and most common way for businesses to increase the speed of receivables. This doesn’t have to be a large discount. It can be as little as 2%. It will be a slight hit to the bottom line, but will improve your business’s cash flow, which has the potential to help fuel growth.
Increase pricing — This isn’t an absolute. Some businesses have their products and services priced too high or to perfection. However, you wouldn’t know the answer unless you changed price points in order to see which were best received. It’s possible that you’re leaving money on the table by pricing your products and services too low. (For more, see: Free Cash Flow vs EBITDA: Which Should You Analyze?)
Sell old inventory — Free up cash by selling old inventory, even if it’s at big discounts. As much as you might not want to admit it, that inventory is a liability. By getting rid of it you can use the freed up cash to help drive sales in your bread-and-butter products and services.
Ask for deposits — When a customer makes a purchase, ask for a deposit. By adding deposits on all sales, cash flow will see a big boost.
Send invoices immediately — To expedite this process as much as possible, use an electronic account system. For customers who are past due use strong language, which should lead to increased payments. The cash received from those payments can be used for other parts of the business.
Use cash flow projections — You can do this with cash flow management software. If you keep track of your cash flow on a week-to-week basis you will have a much better idea of what to expect in the future. This will reduce surprises, which any business owner will appreciate. This will also help you prepare for any necessary changes in receivables. (For more, see: What is the Best Cash Flow Management Tool?)
Communicate with suppliers — If you establish a good relationship with suppliers, they will be more likely to negotiate with you on payment or payment date changes.
Examine payment history of customers — If a customer is taking a long time to pay, offer a discount if they pay in full. If they decline, you can play hardball by informing them that you will not be able to offer them credit in the future.
Track accounts receivable — Avoid slow-paying customers in the future. (For more, see: The Importance of Analyzing Accounts Receivable.)
Perform credit checks on new non cash customers — Avoid future problems. Prevention is the best medicine.
The Bottom Line
The above strategies should help improve cash flow, which should help fuel your business's growth. It will also help prevent problems in payables. And considering updating your technology, such as accounting software and payment management. (For more, see: Breaking Down the Balance Sheet.)