What’s the most crucial financial factor when it comes to your company’s success?
Revenue growth? Profit margins? Net income?
These figures are the most obvious indicators of success. And it can be intuitive for us to look at these numbers when planning the way forward.
But these numbers are just indicators of a financially well-managed company – they’re the result of your efforts. They shouldn’t be the metric you use to guide the company towards financial success.
To achieve future success, you need to focus on the present and evaluate the cause and effect that gets you the results.
From a finance perspective, a healthy and consistently positive cash flow is one of the most important factors which contribute significantly to a successful company.
Cash flow is like the blood supply of your business. With a low supply, your business will get into trouble.
A surplus allows us to capitalise on opportunities and fuel sustainable growth. It makes the difference between success and failure. So how do you generate healthy cash flow for your company? Here are 3 effective ways to create a Healthy Cash Flow in your company.
3 Tips for Creating a Healthy Cash Flow in Your Company
1. Get Paid, and Get Paid Faster (Managing Your Receivables)
Gentle reminders can help you get payments quicker.
As the old saying goes, it’s not a sale until the money is in the bank.
Old, but true. If your customer doesn’t pay you, there’s a risk of being paid slowly, or even turning into bad debt.
Don’t fall into the trap of merely looking at your top-line sales. If you can only collect 50% of all your revenues, then the top-line sales are only half relevant.
Chances are, the more delayed the receivable, the less likely you’ll get paid. So you’ll want to make sure that you consistently get payments as fast as possible. Ensure that you convert your products and services to cash as quickly as possible.
But not all your customers will miraculously pay on time. Managing your receivables requires a systematic process. With a good system in place and a little bit of tact with your customers, you can improve your cash flow situation.
- Be clear about your payment policy. Make sure you send out a reminder before product delivery or carrying out a service. Remind your customer to prepare payment in advance in a friendly way. You can implement a Cash on delivery (COD) policy on customers with whom you have no business history with, and on customers with a slow repayment history.
- Offer incentives/discounts for customers who always pay you on time. Give them more reasons to pay you early. Although a small discount might reduce your revenue slightly, it will improve your cash flow.
- Enterprise resource planning (ERP) software, like Microsoft Dynamics 365 Business Central and Oracle-NetSuite, can automate the process of sending out follow-up payment reminders to your customers. You’ll be surprised how far a gentle reminder would go. Spend some time to create a reminder that’ll appeal to your customers.
- Before approving credit terms, do a quick credit check on all your customers.
Discontinue credit terms for customers with a lot of outstanding debt. You can use accounting or ERP software to better track transactional history of your customers and evaluate them based on their payment history.
- To facilitate quicker repayments, implement interest payments when customers exceed their credit terms. State the interest rate in bold when preparing a quotation. Late interest charges create a sense of urgency for your customers to pay you.
- If your business is project-based, set clear milestones and when you ought to get paid. Remind your customer when a specific milestone is achieved. Reminders can be tricky, so always approach your customer in a friendly, tactful way.
- Account receivables turnover ratio: average number of days your company takes to collect a receivable. Monitor this ratio; a lower number is good news.
2. Reduce the Rate of Your Cash Outflow (Managing Your Payables)
Making sure you're minimising your cash outlays is another important step on the way to a healthier cash flow.
We often relate sales and growth. But that’s an oversimplification of growth.
In chasing sales growth, you might incur more expenses to achieve more revenues – for example, marketing cost and commissions.
From a revenue, cost and profit standpoint, the margins might look healthy.
But, when your expenses flow out much faster than the inflow we collect from your customers, you’ve a problem.
Effectively managing your payables is as important as managing your receivables. They’re two sides of the same coin after all.
- Always try to negotiate for longer payment terms, e.g. 14 to 30 days credit. Stretch your payables as much as possible.
- Maximise your payment terms. Paying on the last day keeps more cash within your operations. You can set up payment reminders to avoid late fees in your ERP software.
- If you’ve excess cash, minimise your expenses by asking for cash discounts. Check if there are any benefits in paying cash up front. (Pay early but reduce your cost).
- Prioritise your payments. If you’ve limited cash, define which payables are essential to keep your business running. Upon that analysis, pay those at a higher priority.
- Create valued partnerships. Forge good relationships with your vendors and service providers;. It can give you more room for negotiation should late payments arise from your customers. Always start negotiations by addressing their position first.
- If you’ve recurring payments with suppliers, set up an automated bank transfer, this will ensure they are paid on time(avoid late fees), while retaining as much cash on hand as possible.
- Payment flexibility over lowest price. Some vendors are slightly more expensive but may offer you much better payment terms. Don’t always go for the cheapest supplier.
3. Invest in a System to Better Manage Your Cash Flow
We’ve touched on two areas of efficient cash flow management:
- Managing your receivables to get paid faster – and increasing your rate of cash inflow.
- Managing your payables better to reduce the rate of cash outflow.
But establishing these processes are just the first step. A process is only as good as the way it is being managed and monitored.
Without a system in place, even the best process can fall apart -and quickly undo all your efforts and careful planning. You’ll need a system in place to achieve long-term healthy cash flows.
An enterprise resource planning (ERP) system can help you manage your cash flow process more effectively. Here’s why:
- Increased cash flow visibility. Provides you with real-time updates on your current and forecasted cash flow positions. You can spot potential cash flow shortages much faster when you use an ERP system.
- It brings properly compliant financial reporting tools, which standardises your business processes, making them consistent throughout your organisation. A consistent process increases its manageability and effectiveness.
- Internal controls to ensure that everyone is compliant with the business process you set.
- Provides you with the tools to effectively manage your receivables, payables and customer reminders. In short, the ERP system makes it very easy for you to streamline your cash flow processes.
An ERP system can be pivotal to supporting and maintaining your cash flow processes.
It can support proper cash flow management, and proper cash flow management turns into healthy cash flows.
With a Healthy Cash Flow, You've Options
A healthy cash flow means that your company has options in both good and bad times.
During the good times, you’ll be better positioned to capitalise on new opportunities. With proper cash flow management, you’ve the cash to fund R&D, develop a new product, make strategic acquisitions, or start a new venture.
In bad times, you’ll need time to strategise, regroup, plan and navigate through the business landscape. A healthy cash flow gives you valuable time to look for a solution while helping your company tide through difficult situations.
Having options can make the difference between success and failure. To have these options at our disposal, we need to build healthy cash flows by managing and monitoring it consistently.
Cash flow issues arise not because of failed finance managers, but due to their failed processes and systems.
Thankfully, these systems are not difficult to implement; it just takes thought, tact and applying technology in the right areas.