How to Accelerate Cash in Your Business

As you manage your business from day-to-day you need liquidity, that is, cash.  Cash is required to pay your bills from suppliers to your utilities bills and even your employees.  So, where is this steady flow of cash coming from?  Your customers!  How do you increase your cash balances in your business? Let’s investigate the Operating Cycle and the steps that are involved in the conversion process.

In order to understand how to accelerate the cash conversion process is it important for you to understand your Operating Cycle.  That is the amount of time it takes for you to convert cash to inventory to sales to accounts receivable to collections to cash again.

In any business, you begin it with cash as you can see below.  You determine how to spend it whether it is on  furniture and equipment or your raw materials. As your raw materials are converted into product you start building inventory. As your sales people become involved and start selling, your billing department bills and your accounts receivable balances increase. Depending upon the way your customers pay their bills, you may receive your money anywhere from 45 to 60 days. Then it is deposited in your checking account and the process starts all over again. At each stage of the Operating Cycle there is an opportunity to shorten cycle times.Operating Cycle Chart

Strategies to Improve Your Operating Cycle

 Your accounts receivable levels are important to watch.  Bills are usually collected on a 45 day basis.  Some customers may even pay sooner than that.  Those customers are gold. Others are not.

You should indicate clearly on your invoices what the terms of payment are.  These are usually 10/20 net 30, meaning that if the bill is paid within 20 days, then the customer is entitled to take a 10% discount on the amount due.  You benefit by collecting on that invoice sooner rather than later and having the money to run your business.

But consider the customer who pays in 60 days.  This customer is costing you money!  You are actually financing this customer to the tune of 36% a year.  That is an incredible financing charge.  Did you ever realize that you were becoming a bank by not collecting on these invoices?  Therefore, it is critical to your cash flow to collect the amounts due you promptly.  Hence, the time value of money:  a dollar today is worth more than a dollar tomorrow.

Consider the following actions to take:

  • Have your available cash reported to you daily and chart it against weekly Accounts Receivable and Accounts Payable Reports. These reports will indicate how long your invoices are outstanding and which ones to watch closely for delinquency.  Your current ratio will be improved with monitoring and you will understand your business better.
  • Get your bills out more quickly. Bill as soon as the shipment is sent out. Hire a person to do nothing but make sure invoicing is timely and follow up on payments.  Send out friendly reminders at least 5 days before the deadline that payments are due.
  • Follow-up calls to customers are important to remind them that the invoice is due. These calls will also reveal whether the order is received in good order and if the customer is happy with the shipment.  Sometimes a customer will not pay on an order that is unsatisfactory because he is a small business and he is just too busy to make that phone call to you; he just holds the goods instead of returning them to you.
  • Understand each customer’s payment cycle, and time your billings to coincide. Offer credit card payment, leasing options to make payment easier for them.
  • If a customer is strapped for cash and cannot pay the total amount of the invoice, then you must ask him to pay something right away. Making an installment plan with him is beneficial to you and to him.  You must collect something in order to make it easier for you to meet your cash demands, and he has just reduced the amount outstanding on that bill.
  • Shorten cycles for delivery of your product. Work-in-progress times should be shortened for faster completion of projects, and the faster your will get paid.


Keeping Your Eyes on the Books

In teaching Entrepreneurship I often tell my students that they should at least understand the accounting and bookkeeping practices involved in their businesses.  They should be able to speak the language of their accountant or bookkeeper and be able to ask for periodic reports to enable them to review their business’ financial position at any point in time.  The several accounts to be mindful of are the following: 

Cash.  All of the transactions your business has pass through the cash account whether it is for the receipt of collections or the payment of bills.  Some bookkeepers use two journals – cash receipts and cash disbursements – to track activity.

Accounts receivable.  If you are a manufacturer or a service provider and you don’t collect payment immediately, you will generate “receivables”, and you must track them by having your bookkeeper generate an aged receivables report indicating which customers owe you money and how long the bill is outstanding. An effort to collect “old” bills is required to get your money.  Busy businesses generate an accounts receivable report daily.  But it is up to you how often you would want to see this report.  But you should review this report weekly for any potential problem accounts.

Inventory.  Products you have in stock to sell are your “investment” sitting on the shelf and must be carefully accounted for and tracked.  Periodic audits of what you have on the shelves and what you have in your books must be compared and verified.  It is important for you to determine what level of inventory is needed in order to satisfy your customers’ demand to avoid any write-downs of obsolete or damaged inventory.  An analysis of these accounts will help to determine this level.

Accounts payable.  No one likes to pay bills and send money out of the business, but if you have good bookkeeping practices you will have a clear picture of everything if you use your accounts payable feature on your bookkeeping software.  You will have timely payments, and you will not pay anyone twice.  Paying bills early may qualify you for discounts with your vendors.

Purchases.  The purchases account is where you track any raw materials or finished goods you buy for your business.  These work- in- process accounts are part of your inventory account, and they can help you calculate your cost of goods sold, which is subtracted from your sales to find your company’s gross profit. Here you will be able to see if you are paying more for your raw materials and take measures to reduce the costs of them and improve your profit margin.

Payroll expenses.  One of the largest expenses for all companies is the cost of paying employees.  Keep this account up to date for meeting tax and other government reporting requirements.

It is important to note if you cannot hire a bookkeeper that you purchase a good bookkeeping software package, like QuickBooks, to help you organize and track your sales, collections and inventory.