A business owner, or someone who works with business owners' cash, has a constant and unrelenting problem. Do you sometimes wonder where your cash went? There are several "tricks of the trade" that well managed companies utilize to maximize their cash flow. These cash policies can be used by any business, large or small. Here are a few of them that will help you keep cash in your checking account.
Do you know what a cash conversion cycle is? Loosely defined, it is the amount of time it takes a business to convert a sale to cash. The shorter your cash conversion time, the better managed your cash flow will be. The cash conversion cycle is expressed in days. Know what company has the best cash conversion cycle? Dell! Their cash conversion cycle averages -15 days. Yes, that is MINUS 15 days. How do they do it? First, they get you to pay for your computer up front so they have your cash. Your cash is in their account, but they haven't delivered anything yet. Second, they don't order the parts to build your computer until the order is placed and paid for. Therefore, they don't carry excessive inventory. Have you ever noticed that you pay extra for the immediate service? They are essentially getting you to pay for their inventory carrying cost. Lastly, they don't pay their vendors until the bill is due, or even a little later.
Starting to get the idea? Here are a few things you can do to help your cash conversion cycle.
Get Faster Collections
1. Bill via email so your customers get their invoices more quickly. This starts the clock ticking sooner on the payment due date.
2. Use state of the art cash management tools such as remote deposit technology.
3. Contact the customers before the invoice is due! Make sure the customer is satisfied with your product or service and that the invoice is set up for payment.
4. Start a collection procedure as soon as invoices become overdue.
1. Don't order inventory until you absolutely need it. Establish re-order points and minimum order quantities.
2. Limit access to inventory to prevent theft.
3. Get rid of any obsolete inventory, immediately.
4. Consider using contract manufacturers. Let them use their cash to hold the inventory.
1. Don't pay vendor bills until they are due. If it says due on receipt, take at least 15 or up to 30 days.
2. Take all payment discounts.
3. Negotiate longer terms with your vendors. Don't be afraid to ask for 60 days to pay.
There are many other actions that will help you convert that sale into cash, faster. Think about how your cash flows. Efficiency is the keyword.