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Need More Cash

Nov 15, 2008

 

A business owner, or someone who works with a 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.

It all starts with something called the cash conversion cycle.  This simply means 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. Some people believe that they are doing a good job when their cash conversion cycle is running +60 to +70 days.

Dell Computer has a different way of looking at this issue. Their cash conversion cycle is -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 bank 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.

I am not suggesting that you model your business after Dell, however here are a few things you can do to help improve 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.   

Reduce Inventory:

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.

Stretch Payments:

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 carefully about how your cash travels through the business. Your checkbook, the banker and your employees will think the better of you for it.
 

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