Written by David Bloom, co-founder, fdu group
Wednesday, 21 December 2011 10:06
The quicker you can get cash through the door from your customers and the slower it has to leave to pay your suppliers, the better.
Positive working capital is critical, ensuring you can pay-off short-term liabilities for long-term business success. In essence, the quicker you can get cash through the door from your customers and the slower it has to leave to pay your suppliers, the better, so that cash stays in the business and works harder for you.
Some business models do work better than others in this regard. For example, if your business has large blue chip customers who don’t pay for 60 to 90 days and expensive staff who need a pay cheque every month, you’re going to have a much bigger challenge managing working capital than say a restaurant where cash is in the till before you have to pay for food and wages.
These tips will help you maximise your working capital, regardless of your business model, assuming you have a business that is trading normally and is not in some kind of crisis or recovery situation:
1. Minimise your payment due date on your invoices. On your invoices clearly state “Payment due within X days”. Then ask yourself why this cannot be “Payment due on presentation of the invoice”. The answer may be due to industry standards for your line of business, but just remember that if you say 30 days, you won’t get paid until day 45 or later, so you might as well put the earliest date possible.
2. Stay on top of collections. Cash is the lifeblood of your business so the invoices you are sending out need monitoring and collecting on. It is a fact of business life these will not get paid on time so you have to proactively manage the debtors ledger. Make this part of the job of your finance manager and/or admin support in the office, if one is available.
3. Margin - look for the 80:20: make sure you know which of the products or services you provide generate the most gross margin. Often 80% of your margin will come from just 20% of your product or service offering. Unless there is some strategic reason why you need to, don’t waste time and effort on chasing in cash and paying suppliers for products that add nothing to the bottom line, or worse, lose you money.
4. Stockholding is the cardinal sin. Don’t keep cash tied up in stock as this is the cardinal sin related to margin. Knowing your sales volumes will help you keep track of how much stock you should be holding.
5. Keep a rolling weekly cash flow. Forecast your cash requirements on at least a rolling 12 month plan. Know when cash is tight, which is usually around month end for salaries and quarter end for VAT and rent payments. If you don’t know where you are with cash it will bite you hard and possibly give you a fatal wound.
6. Communicate a payment policy. Let your suppliers know that you do one payment run a month and what date that falls on, and ideally make sure they know that your payment dates are in the month following receipt of invoice. Depending on the size of your suppliers, some will accept and some will dictate to you. Having one a month will also free up your finance manager’s time for collections.
7. Treat preferred suppliers differently to other suppliers. If you have key partners such as licensors or business advisors, treat them like employees and pay on time, unless cash flow dictates otherwise. Do not let poor payment become a de-motivator or bone of contention with people that are critical to your success.
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