How To Avoid A Cash Flow Crisis
Is your company growing and profitable, but you still find yourself strapped for cash? It's an uncomfortable position; as a company grows, its need for cash increases, and you don't want to spend your time worrying about whether you have the cash to implement your decisions each day.
Here is a checklist of cash flow strategies and tactics that will help you to avoid a business cash flow crisis.
Good internal communication can prevent cash flow waste. Imagine your sales department taking orders, your marketing department spending cash on advertising, and your design team making changes to the prototype even as your production team creates your product ... it's a recipe for cash flow waste.
One of the most important things you can do to avoid cash flow waste is to get together members from each department who are working towards the same goal. Think of it as a product development committee that meets weekly to communicate status and avoid inappropriate action.
To avoid needlessly tying up your cash, your purchasing department should take action based on the information gathered from the status meeting described above. Inventory should not be ordered until the product is ready for production. If you have already ordered inventory, but your product will be delayed to market, talk to your vendor about extending payment terms. You may need to return or sell parts that are no longer needed.
Deal with your vendors honestly and quickly and you'll avoid having your cash wrapped up in unneeded purchase orders.
Marketing and sales
Co-ordinate your marketing and sales efforts with product availability. Also, determine ways to target those customers who have the ability to pay and pay quickly.
Once the new product is sold, your cash collection policy can make a significant difference to the amount of cash you have on hand. On average, how many days does it take to collect the cash after the work is done or the product has shipped? 30 days? 45 days? 90 days? The shorter the delay, the more money you have in the bank. Use the formula below to determine your average, then get together with your collections team to develop ways to lower that number.
DAYS SALES OUTSTANDING FORMULA
Sales for the year ÷ 365 = average daily sales
Accounts receivable balance ÷ average daily sales = Days Sales Outstanding
Benchmark: 45 days is a good goal
Here are some ideas to kick start your new cash collection policies:
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