Hi, my name is Adam Stewart, Debt Collection Expert and owner of Debt Recoveries Australia. In this week’s “Better Credit Control” blog, I want to share some quick ways you can increase your cash flow and at the same time, reduce your account receivables.
I always say, cash is king in any business. You can be profitable and still go bankrupt because of cash flow problems.
Cash flow is having the right amount of cash in the right places at the right time, every time. This cash can be sourced from a few areas, such as capital investment, borrowings and the like, but the main way you want to generate cash is from profits.
As we all know, the only way to make profit is by selling something for more than what it cost to produce. Profit is the difference between the amount a business earns and the amount spent in buying, operating, or producing products and services.
Profit is great, on paper, but if you have not yet collected the payments from your sales, even though your books will show a nice profit, your cash flow may well be terrible because you are still waiting for people to pay. To make it worse you probably have already paid for your stock and staff as you were making your sales.
Here are six quick ways for you to increase cash flow and reduce debt:
1. Systems and Processes
As you know from my previous blogs, I love systems and processes. Do you have any idea of who owes you and how much they owe you? You should be able to produce a report, down to the very cent. If not, make sure you have a proper accounting system in place. Slow paying debtors means more cash is locked-up so you cannot use it to pay your own bills and staff; this is usually the biggest contributor to bad cash flow. Debtors paying sooner will create a faster flow of cash so you can reduce your borrowings, or fund growth more easily.
So to increase cash flow quickly, make it easy for them to pay. Accept payment via as many channels as possible, ensure you have EFT (electronic funds transfer), take credit cards, cash, cheques, etc. Keep your invoicing up to date with an online accounting package that has a built in accounts receivable component, such as Xero. Have a dedicated, debt collection agency on call, as part of your accounts receivable process.
Do you have a credit application form? Clear terms on your invoices? Do you charge interest for overdue amounts?
If you do not know about and support your own cash flow, why would anyone else care? Without clear payment rules, and you sticking to and enforcing these rules, customers will put their own cash flow first by letting amounts overdue to you stay that way.
Create and enforce very clear payment rules in your terms and conditions. Charge interest and a recovery fee and make sure this is made clear on your credit application forms and on each invoice.
Choose your customers carefully and be very clear about what you expect. Get your collection agent to conduct a credit report on potential clients. Get them to fill in a credit application form (I can give you some templates). Do not be afraid to say no if you are not comfortable with the potential paying power of your new customer.
Unfortunately, late payers are common and chasing them can be very time consuming for you, when you should be concentrating on servicing your quick paying customers.
Can you pay your bills as they fall due? If you are not able to pay your bills within their terms then you are trading whilst insolvent and this is illegal in most countries. Cash flow is the main trigger of business failures so it is critical to ensure you have sufficient cash at all times, or face the harsh reality that perhaps you need to find another business. Keep abreast of you current cash flow state of affairs. Meet weekly with your bookkeeper, credit manager or accountant. Ask them what the current level of solvency is on a regular basis.
Get a good bookkeeper/accountant and pay them well. Good forecasting of cash needs and good decisions will help you stay within your cash capabilities. The easiest way to do this is to have a budget, ensure you use that to create a cash forecast and carefully monitor how you are progressing against what you predicted. Even for a tiny business, creating these tools is vital to both manage cash flow well and to help secure finance if needed.
Payroll is usually one of the largest cash requirements, so being aware of your staffing needs on a day-to-day basis is to a great way to improve overall cash flow of the business. Think about commission-only payments, rather than salaries. If you pay bonuses, have them linked to KPI’s and performance. Do not pay someone to do your debt collection when you can outsource this to a professional. Have your staff concentrate on what they do best, servicing your customers, not chasing up debtors.
I hope this will help to make your business or company more profitable and help with the day-to-day paying of bills and getting your bills paid more quickly. Give me a call if you need any more help, or if you are ready to outsource some of your hard to collect debts. You may contact me on ADC Legal Litigation Lawyers at 1300 799 820. You may also email me at firstname.lastname@example.org or Skype at adclegal.