User login

Show Me the Money!

(August 2007) posted on Tue Aug 07, 2007

Roberts explains how to establish and manage cash flow in order to keep your business successful, profitable, and growing.


Let’s take a brief look at the point the accountant was trying to make. We all know that in a perfect world, every customer pays up front when the order is placed, allowing you to use the cash to cover the cost of materials, employees, overhead, etc. We also know that we don’t live in a perfect world and net 30 is probably the best we can hope for, with a sizeable number of our customers coming in at the net 45 point, if we prod them hard enough. Seems that a lot of other businesses also juggle their payables against their billing, but if we can free ourselves from this vicious cycle, it’s possible to use the system to our advantage.

The formula is simple. If we build up a reserve of cash, then we can stop worrying about what to pay when and in-stead pay everything religiously at the very latest point that still allows us to remain current. This frees us up to concentrate on persuading our customers to pay on time. No, I’m not thinking about sending out some hoodlums to break a few bones. Although, I would love to try that on a few of my current customers. Fortunately, there are other incentives that can have equally effective results.

Offer a discount to customers who pay within a week of delivery. You will be amazed at how that can spur a bookkeeper to put your invoice at the top of his or her pile of bills. Make sure your invoices go out immediately after you ship the goods, and stamp a pay-by date in large letters somewhere on the invoice. Those who pay the bills will see that glaring date every time they shuffle through the pile as they try to decide which check to write next.

A company that I once consulted adopted this small change and saw a dramatic increase in on-time payment. The most important thing is to not let anyone slide. Keep a running tally, and if you don’t have payment by the day it is due, make sure someone calls your customer to find out why you haven’t received payment. Be polite, but be consistent and firm.


Terms:

Did you enjoy this article? Click here to subscribe to the magazine.