Over the past couple of months I have regularly mentioned the need to take action to improve cash flow as part of any business planning process. I have also talked about the benefits of using 3 way budgets when performing cash flow forecasts and by doing what-if scenarios seeing what the end difference is by improving debtor days.
So let's assume now that you've got your figures from your accountant and you've worked out that it's taking you on average 35 days to get paid. You've looked at your cash flow forecast and based it on getting paid on 25 days which has added an extra $120,000 to your bank balance.
What are some of things you can do to get your debtor days down? Here are some strategies for you to consider.
Figure 1 Who ordered medium-rare? Keep your debtors down or you may get burnt!
1. Reduce Trading Terms
What are your trading terms at the moment? Can you reduce them from say 30 days to 7 days? Be sure to give notice to your existing customers. For new customers it should be a no-brainer.
2. Ask for a deposit
For any orders for goods or services, ask for a deposit upfront.
3. Hire a part-time debt collector or restructure
Determine whether any of your admin staff have time to set aside to chase debtors. If not, consider hiring a part time person to perform this role.
4. Remove 30,60,90+ Days from statements
Change your statements to show Current and Overdue only.
5. Offer better terms for payment upfront
Consider discounts for payments upfront (be careful with this one as you need to weigh up the benefits versus costs - redo your budgets).
6. Charge interest for outstanding debt
Interest and late payment fees are good incentives for invoices to be paid on time.
7. Cease supply for non-payment
What is your company's policy to freeze supply when invoices are outstanding?
8. Quote Upfront
Customers and clients don't like surprises! If you give them certainty, it opens up the opportunity to offer up front payment discounts and reduces objections.
9. Understand court collection requirements
Determine how these debts can be chased and the costs so a decision can be made on whether to chase the debt.
10. Have a better screening processes before offering credit
Have a credit application form which allows you to find out about the customer before deciding to offer credit terms (refernces and credit checks through credit research companies).
Figure 2 Fix your cash flow and your ship will come in!
Some of the above tips may on the surface seem pretty standard but it is amazing how they are not examined or followed up and enforced. Every business plan should address cash flow when determining strategy. Getting your debtor days down will allow you to free up some cash flow and invest back into the business (where required) so you can then do the things that will help your business to become more profitable. A more profitable business which generates positive cash means business valuers Sydney will make your business valuation higher.
After all, who wants to buy a business that is always struggling for cash?