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3 Tips to Improve Your Company’s Cash Flows

Mark A. Guillaume, CPA, CCIFP
Mark A. Guillaume, CPA, CCIFP Director, Audit & Accounting, Construction & Real Estate Industry Group Co-Leader

You often hear that cash is the lifeblood of an organization, and I would agree. I have observed many companies that have grown their top and bottom line results, but struggled to meet their cash flow demands. It sounds counterintuitive, but increases in revenue and profits do not always result in a corresponding increase in cash flow. This can happen when the working capital necessary to operate the business increases, or when profits are tied up in receivables and/or inventory.

Here are a few tips to improve your company’s cash flows.

1. Project future flows.

The first thing to do is prepare a cash flow projection, which will allow the business to plan ahead for cash excess or shortfalls. It is better to know about cash shortfalls months in advance rather than when cash is already short and you have fewer options to remedy the situation. Banks and vendors do not like to be surprised by requests for additional financing or delays in payments.

A rolling 12-month cash flow projection is a best practice. When preparing a projection, consider customer payment terms and history, anticipated expenditures (payroll, inventory, capital investments, debt repayments), vendor payment terms, and the cyclical nature of sales.

If cash is currently or projected to be short, you can try using external financing to shore up the shortfall. But keep in mind that there is a financial cost with this approach. It may be more cost effective to focus on improvements to the operation cycle—specifically, customer receivables and vendor payables. On the other hand, if you anticipate a cash excess, take the opportunity to evaluate where that cash would best be utilized.

2. Stay on top of receivables.

Collecting customer receivables can be challenging because you are at the mercy of your customer to make payment. To help ensure you collect in a timely way:

  • Know your customer and establish appropriate credit limits and terms.
  • Evaluate new customers before doing business with them and consider requiring cash deposits. It is better to lose the sale than to sell and not collect.
  • Invoice in a timely manner so the collection clock starts early.
  • Offer discounts for quick payment, if it makes sense for your business.
  • Have an experienced team and process to evaluate accounts receivable and contact customers when payment is not received within the expected timeline.
  • Evaluate whether past due customers are still a good fit for your business, given the costs and challenges of collection.

3. Consider how you're paying vendors.

Paying vendors faster than your customers pay you can be problematic. Evaluate your vendors’ terms and pay them when due. There is no benefit to paying vendor invoices early, unless they are offering discounts for quick payment. Even so, it may not make sense to take the discount if cash flow is tight.

If they accept electronic or credit card payments, consider taking advantage of this to pay on the last day due. In the case of credit card payments there could be the additional advantage of longer float and money back; however, credit cards should only be used if you are certain the balance will be paid off monthly.

Compare vendors’ terms and pricing. It may not always make sense to use the cheapest vendor based on their payment terms. Be careful when suppliers offer significant discounts or push for sales prior to price increases; it may be a good deal, but carrying excess inventory ties up cash. Finally, for key suppliers, you need to develop trust and be up front with them in case you ever need to ask to delay payments. Losing a key supplier because of payment delays is not a viable option.

Understanding your current and future cash position is the first step to improving your cash flow. By identifying any problems early, you can modify the course of the ship to improve cash flows and the overall value of your business.

Mark A. Guillaume can be reached at Email or 215.441.4600.

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Mark A. Guillaume, CPA, CCIFP

Mark A. Guillaume, CPA, CCIFP

Director, Audit & Accounting, Construction & Real Estate Industry Group Co-Leader

Construction Specialist, Real Estate Specialist, Owner Operated Private Companies Specialist, Private Equity-Backed Companies Specialist

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