As we examine the root of poor cash flow – it comes down to four key areas; payables, receivables, inventory and financing. It is the administration of these areas that leads to a cash-gap – which will ultimately create a cash-flow challenge. The cash-gap is the time between paying for your goods/services and collecting for them. In the next four weeks we are going to examine each of these four areas in detail. Our objective will be to suggest some possible improvements so that it can trigger a strategy that you can immediately implement into your business. This week, let’s start with our payables.
1. Consolidate vendors for better pricing. Just as we compete with many other companies that offer the same products and services, so too there are multiple vendors that can fulfill our needs. We can either delve into a process of cost comparison, or we can look at current vendors and consolidate our ordering around the one with the best value and terms.
2. Increase the credit taken from suppliers and extend terms. Go back to every vendor with whom you do work and negotiate for better terms or extended credit. Those with the most lenient terms deserve your loyalty.
3. Make prompt payments only when worthwhile discounts apply. Push your pay cycle to the limits of your extended credit unless a vendor makes early payment options worth your while.
4. Pay your bills promptly to demonstrate your value as a new customer. After you build a history of payment with new vendors, negotiate extended payment terms – a supplier will often give a good customer 30 to 90 day terms.
5. Keep overheads to a minimum. It is critical to minimize fixed costs inside of your business. Before purchasing something, set increased sales goals to justify and fund the expense.
6. Go to twice-monthly payroll – 24 periods. This one can become unpopular unless it is well handled. Employees must understand the mission or the enterprise and be excited to be part of the team. For sales employees move towards paying commissions and bonuses in the 2nd pay-period in the month following the activity. It is even better to pay on collections instead of billing. This incents the salesperson to be vigilant about collecting and sharing the burden of selling only to those clients that are either Cash-In-Advance or credit worthy.
If you have any questions about how to implement these strategies, I welcome your call. Next week, we will make some suggestions in the area of receivables. Until then, have a tremendous week!