1. Set and follow sound credit policies.

By establishing policies and procedures for granting credit, the business will be able to improve its ability to make sales and collect the cash due from those sales. The basis of granting credit should be a combination of the history with the customer and a demonstrated ability by the customer to comply with credit terms.

RECOMMENDATION: When checking credit references ask for references not only from the major vendors, but from vendors of similar size and type. Larger vendors tend to have more leverage to enforce payment agreements and may have more generous terms. The payment history with vendors of similar size, type (service or product), terms, and "power" usually provides a more accurate reflection of how accounts will be handled.

2. Set procedures and policies to bill promptly and accurately.

Regardless of business size, there is often a time lag between when the bill can be sent and when it is sent. Every delay in sending the bill is another day that cash isn’t available for use.

RECOMMENDATION: Establish procedures for each area of operations to insure that the invoice can be sent same day as shipment is made (or for services according to agreement). Make sure that all necessary documentation is provided to the accounts receivable department so the invoice is accurate. The clock starts ticking only when an accurate invoice is received. Avoid delaying payment by insuring that all necessary information is available, accurate, and reflects the parameters to collect from the customer.

3. Consider "incentive" terms.

Many customers will pay more quickly if they get a discount for early payment. If a decision is made to establish discount terms, make sure the discount is taken ONLY when the terms are met. Some customers may have a policy to automatically take the discount regardless of when they pay. Keep an eye out for discounts taken outside of terms.

RECOMMENDATION: When making a change in credit terms of any kind, including adding a discount, send a separate letter to each customer letting them know what has changed and the conditions that apply to taking the new terms.

4. Deposit checks same day received, preferably before 2 pm (or bank's last daily transaction time).

What a difference a few hours make. With changes to electronic funds transfers and automated clearing house processes, this simple change can add a “day of cash” to the cash balance by getting the checks to the bank the same day. Waiting until the end of the business day to make deposits results in the loss of an entire business day in the account. Holding checks for several days magnifies the impact on the cash balance.

RECOMMENDATION: Establishing a daily deposit time around 1 pm this enables the business to get a significant number of the days receipts to the bank for "same day" processing and gives some flex time for meeting the bank transaction cut off time... it could be considered a "late lunch" activity.

5. Pursue past due and late accounts.

It is one of the most difficult tasks in business - collecting the past due accounts. Add to that task the enforcement of late fees and interest charges and the stress level on the task escalates more than proportionately. By taking prompt action to collect past due accounts, the terms and conditions become "clearer" to customers. There is usually some concern about losing a customer/sale. If customers aren't paying (on time or at all), then enforcing terms or cutting off credit results in the opportunity to sell those goods and services to someone else who will meet the terms. If customers go 45 days beyond terms, consider employing a collection agency to act on those accounts.

6. Keep inventory levels under control.

Growing investment in inventory beyond the level necessary to satisfy demand is a quick way to drain cash from the company. The goal is to find the inventory level that doesn't lead to lost sales and doesn't place a strain on cash resources.

RECOMMENDATION:  Monitor inventory levels, reorder points, and historical/seasonal sales to work toward an "optimum" level. It may not be the same level throughout the year.

7. Pay vendors on terms.

By paying vendors on time the relationship is built for "exceptions" and better terms. The "exceptions" are those instances when the business can't make a payment on time or in-full. Establishing a pattern of reliable payments and communicating with the vendor at the earliest possible time to notify of an issue lays a solid foundation for managing the supply chain.

RECOMMENDATION:  Be reliable in meeting payment terms and communicate issues and potential shortfalls, late payments, directly to the vendor. Do not just send a partial or late payment to a vendor – give them a call and let them know what is going on. The vendor may be able to be flexible and, while not happy, prefers not to get a surprise.

8. Manage the supply chain.

Suppliers can be great business partners. Negotiate for better or extended terms. The first step to negotiating better terms is having a solid payment history and relationship.

There are arguments on both sides of having sole source suppliers or multiple sources of supply. One of the pros of sole sourcing is that a different type of relationship results from a "guarantee" of business for a specified period of time. The converse of that is also true - if there is only one source and that source has quality, delivery or other issues - it can be costly to address those issues. Not only is it costly to address with the supplier, it also can have “flow-through” impact to customers.

RECOMMENDATION:  Have a few solid suppliers for each critical resource. By having two or three good suppliers that receive orders consistently, the business has alternatives and leverage for favorable terms.

9. Evaluate lease versus buy options.

While leasing equipment may over the length of the agreement be more costly than buying equipment, when the company is short on cash and equipment is needed it may be the right option for the short term. Leases generally reduce the cash outlay at “acquisition” and enable the business to replace or add equipment that is needed to generate revenues and ultimately cash.

RECOMMENDATION:  Understand the “cost” of cash. If cash is tight and the alternative is not being able to meet “absolute” cash needs – items that can’t be put on extended terms – then making the decision to trade-off between cash availability today and higher long term expenditures is an acceptable choice. If the business isn’t able to meet cash needs today, the cost of the equipment will be irrelevant, as the business won’t exist.

10. Educate and communicate the cash perspective.

It is important that every person in the company understand their role in the cash cycle. An understanding of budgets, constraints, and how the cash cycle of the business works is important for all levels of the organization to understand, whether working in accounting, purchasing, operations, or maintenance. The entire organization, from the President/CEO to administrative and technical staff, has a role in controlling costs and generating revenues (and ultimately cash).

RECOMMENDATION: Make the cash cycle visible and understood throughout the organization – communicate the time it takes from purchase of inventory to collecting the cash. Clearly communicate where each role fits in the equation – spending, revenue, cost control, collections, and so on. Set performance measures for individuals, teams, and functional areas that include cash performance measures.

Cash is the lifeblood of the organization. Without cash to pay employees, buy inventory, and so on, the business isn’t able to operate. When cash is limited the entire organization needs to understand how to preserve it, conserve it, and make it!

Keep in mind that good vendor relationships can be great marketing tools. Vendors do have other customers and connections. A good relationship may often lead to referrals of the vendor’s other clients to you!

Copyright © 2004 F.O.C.U.S. Resource, Inc.