Effective cashflow is essential for survival, profit and sound business.
As a business grows, the need for increased working capital increases as does the need for cash flow optimisation.
Cashflow can be enhanced by a number of means such as factoring (selling the debt to a third party), invoice discounting, offering early payment discounts or improving debt collections procedures.
Factoring and invoice discounting however, often mask serious operational problems that need attention.
A business that does not actively collect its receivables is operating sub-optimally. The cost of funds quickly erodes profit margins through delayed collection.
Quantifying the benefits
Tracking your Days Sales Outstanding (DSO) figures allows you to calculate how long on average it takes to get paid after an invoice is issued.
The benefits of a reduction in DSO also lead to a reduction in bad debt write-offs.
Optimising cashflow
You can optimise your cash flow in-house by implementing some or all of the following strategies, as appropriate for your business:
- Devise a sound Credit Application/Contract, which clearly spells out your credit terms, and policies regarding issues such as late payment.
- Seek Personal Guarantees from Pty Limited companies.
- Run credit checks on applicants before opening accounts.
- Set credit limits.
- Limit purchases to the credit limit and increase limits only if the customer has previously adhered to your terms.
- Invoke a STOP CREDIT policy when accounts breach your terms.
- Measure DSO.
- Send statements on the first day of the month.
- Send statements electronically, with electronic access to invoices embedded in the statement.
- Keep the Aged Trial Balance (Debtors Ledger) in descending dollar value order.
- Ensure that debtors representing 80% of the dollar value of outstanding accounts are rung monthly.
- Ring the larger accounts well before payment is due to ensure agreement about amount, resolve any issues and make payment arrangements.
- Ensure collections activity is scheduled, monitored, recorded, controlled and measured.
- Motivate collections personnel by paying bonuses for achieving budgets and reducing cash costs.
- Form a joint marketing/sales and Accounts Receivable (AR) team to discuss strategies for problem-paying accounts.
- Resolve credit claims within a controlled minimal period.
- Select goal-orientated personnel.
- Provide regular training for AR personnel.
- Standardise recording activities and use shorthand codes for simplicity.
- Dedicate sufficient personnel to collections and assign any extraneous tasks to other employees.
More information
Talk to your Accountant or Business Advisory Services advisor for more information.
Learn more about cashflow from the Small Business Tool Kit's finance module. It includes videos and case studies and information on forecasting, cashflow management and writing cashflow statements.