Are you optimizing cash flow?

Cash flow is considered the strongest barometer of your company’s financial health, so when investors analyze companies, one of the first things they look at is cash flow. This holds true in public companies as well as privately held companies. Seasonal business or technology shifts can affect cash flow, but the biggest determinants are your internal processes. Following are a few of the most effective ways to improve your cash flow:

1. Bill more frequently
   Bill weekly, if possible. For larger, long-term projects, ask to do regular progress billings or request a 50 percent down payment.
   
   
2. Follow-up on past due accounts
   Create a follow-up schedule with the same frequency as your billing cycle to stay on top of past-due receivables. A good rule of thumb is that 20 percent of your past due accounts make up 80 percent of your past due balances, so follow up on those frequently. Many companies are now taking a more proactive approach to collections. For instance, they may make a courtesy call a few days before the invoice is due to ensure it was received and remind the recipient that it’s due soon.
   
   The best measure of collections performance is days sales outstanding (DSO). It’s calculated monthly as a rolling average every 90 days. The goal is get your DSO as close to your invoice payment terms as possible.
   
   
3. Don’t pay invoices early
   Some companies pay every invoice they have on hand when they sit down to pay bills, which can hurt cash flow. If an invoice is dated the first of the month and payment terms are 30 days, wait until the 25th or so to pay it so you keep cash longer. Some companies offer a discount if you pay early, but you need to assess whether the discount amount is more beneficial than keeping the cash longer.
   
   
4. Improve your inventory turn
   If you have a manufacturing or other business that requires inventory, this should be your priority area. While you don’t want inventory to be so low that you risk a work stoppage, you want to keep it as low as possible. It may be tempting to take that volume discount deal being offered by a supplier, do you really need 1,000 widgets? The cost to carry the inventory for several years and the fact that it may be obsolete before you can use it all usually outweighs the 5 or 10 percent discount.

Contact one of our privately held business experts if you’d like to discuss ways to improve your cash flow.