Let’s face it, you can be profitable and broke. (Have you ever tried to make payroll or pay vendors with so-called profits?)
You don’t want to get into a position of paying your invoices late. This is a situation that needs to be remedied ASAP.
Profits are an important source of cash. The reality is that small business owners tend to focus 100 percent on revenue and profits. This takes their focus away from creating and managing operating cash.
It’s incredibly important for you to measure how long it takes a dollar spent on anything — rent, utilities, marketing, payroll, etc. — to make its way through your business and back into your pocket.
Here are a few strategies that will help you towards this goal.
Two things you must do to stay on top of cash
Before digging into the five cash management strategies, here are two things you must do to stay on top of creating and managing cash. For without them, there’s no point in working to shorten your cash conversion cycle.
1. Change your thinking.
Stop saying, “Well, this is just the way it is in our industry.” Just stop. It puts you in the wrong frame of mind. And it’s not true. Not with an efficient a cash management process in place.
2. Get daily cash reports.
Have your available cash reported to you every day along with a short explanation of why it changed in the last 24 hours. And — if you want to be REALLY good — chart it against accounts receivable (AR) and accounts payable (AP) every week.
When it’s topmost in your mind, what you measure is what you can manage.
Five strategies to shorten the cash conversion cycle
Now that you’re managing your cash and know what’s happening with it, put these five strategies to work to keep cash flowing and grow your small business.
1. Get paid sooner.
Here are three things you can do to speed up payment on your invoices, or accounts receivable.
- Call your clients a few days after they should have received your invoice. Verify the following:
- They received it in the right department.
- Everything is in order with the invoice.
- It is in queue to be paid.
- Put a specific due date on the invoice, not as NET 30 DAYS.
- Call your client’s accounts payable office a few days prior to the due date to make sure the payment will be issued on time.
2. Obtain a recurring ACH authorization.
If you have small, recurring invoices, then there’s a good chance you can make ACH authorization a condition of doing business with you. Obtain a recurring ACH authorization to automate on-time debits with ACH. (If most utility companies do it, why not you?)
3. Investigate to find out why your clients pay late.
They might be unhappy with your product or service. If so, this is obviously a MUCH bigger problem that needs to be addressed.
Maybe there are mistakes on your invoices. This annoys the accounts payable team especially those working for a big corporations. They’re sticklers about how they want your invoices submitted. Defy them at your own risk.
4. Review clients’ payment cycles.
Identify each client’s payment cycle. Once you figure it out, time their receipt of your invoices to match.
5. Talk to your clients.
No one likes an uncomfortable conversation. Still, things may improve after having one. If things don’t get better, maybe it’s time to fire your client.
Struggling to figure out what to say in this conversation? Try this and adapt it to your preference.
We have been doing business for [number] years. As far as we are concerned, the relationship has been wonderful. I assume it has been for you as well.
When we started our relationship, there was an understanding that we were going to deliver world-class [name your products or services] to you. Furthermore, we committed to being available for you 24/7 and bend over backwards for you when you have tight delivery schedules.
You probably recall us doing just that very recently. Your part of the deal was simply to pay us within X days so that we can continue providing the quality and service that you expect.
I am concerned that your part of the deal has been lacking lately. It’s important that we bring it back to where we are both happy with our relationship. Who can I talk with about this matter? (If you are already talking to the right person, ask: “What can be done immediately to remedy this situation?”)
It may take time before you get it all straightened out. Nonetheless, you still need to make payroll and pay your vendors. If you don’t have enough operating cash to cover it, then it may be time to look into a small business bank loan, invoice financing, or another way to get the working capital you need. (Avoid merchant cash advance because that’ll lead to more cash trouble.)
Cash is the oxygen that fuels the life and growth of your business. Isn’t it worth the effort to stay on top of your cash and implement these strategies to shorten the cash cycle?
Image credit: Recrea HQ