Improve Your Cash Flow In A Down Market

You have purchased and installed the software reporting system. You have the bookkeeper keeping track of your company’s billing / receivable policy. And you have a good outside accountant. Now that you have the three most essential tools for cash flow management, what do you do with them? How do you use them to bring in cash faster, make the best possible use of that cash when it comes in and cut down on the amount of cash going out?

Here are a dozen tips on how to use those tools to help you improve your cash flow.


Cash In - Ways To Speed Up Cash You Need

Analyze your product or service pricing.
First, regularly take a hard look at all the costs associated with providing your product or service to the end customer. Have your product prices kept pace with increases in those costs? You may also want to make monthly or quarterly checks of your competitors pricing. Unless you have demonstrably different value points, your pricing for basic products and services should be in line with your competitors. So, if your competitors are charging higher prices, maybe you should raise yours.

Send your bills sooner.
Many of your customers run their accounting systems on a payable voucher system or another ""system"" which requires several steps before your company’s bill is actually in the ""to-be-paid"" category. Like you, not only do they want to verify invoices received, but they also want to pay only as close to the due date as they need to without upsetting the relationship. Get your bills out on as close to delivery or service completion dates (periodically if contracting) and don’t let internal administrative schedules dictate when they go out. Know whose attention the bills should go to at your customer and include the department in case there is employee vacation or turnover at the time your bill is received. Don’t let a customer’s administrative procedures delay your bill collection.

Use cash discounts to increase the speed of customer payments.
Implement a cash discount for early payers of your bills. Industry standards are 2/10 and 1/15, meaning 2% off for payment received by the tenth day of your thirty day billing cycle or 1% in fifteen days. Be as strict or as lenient as you care to be over the actual receipt versus mailed (you want the date payment is received, the customer will want date mailed!) discussions. Above all, implement your policy, communicate your policy to customers and stick to it to minimize misunderstandings.

TIP:  Remember, there are a number of costs to your business where time is a variable. For example, the longer your credit line borrowings are outstanding, the higher are the total interest costs. The sooner you pay vendor invoices with early pay discounts, the lower are your purchasing costs. So it stands to reason that the sooner you receive payment from your customers, the better you can use that cash for your business.

Finance - Use Your Cash Wisely

Invest unused cash.
In order to maximize cash return, even in low rate environments, any unused cash should be put to work in interest-bearing money market accounts. Many banks make the job easier by ""daily sweeping"" of cash from checking accounts into an overnight money market account. Checks drawn on the checking account are cleared each day. This type of account is preferable to your business trying to calculate surplus cash from one period to the next so that such funds can be rolled into a money market account. If a sweep account is an option at your bank and the fees are similar to regular checking, open the sweep account.

Consolidate outstanding loans.
In a low rate environment, consider consolidating outstanding higher rate loans into a lower rate term loan. Such a consolidation may not only lower interest expenses, it may extend your loan payments over a longer period of time, thus reducing monthly principal repayment. When considering such a refinancing, also investigate the availability of a working capital line.

Institute a check-writing schedule.
Implement a bi-monthly check writing procedure. Not only will this reduce inefficient uses of accounting and administrative personnel, it will also provide ample time for the invoice approval process to take place. In emergency situations or when an unusual discount for early payment becomes available, write checks out of the schedule.

Consider leasing new equipment purchases.
If your business can really benefit from the purchase of new equipment, but cash flow budgetary considerations say ""No"", consider leasing that equipment. Even though leasing costs are generally higher than purchasing in the long run, your business will be able to stretch the acquisition cost over several years. Leasing companies are excellent sources of product and capital market information and often times can alert you about unsuitable terms of your negotiated purchase, before the transaction takes place!


Cash Out - Spend Only What You Need

Shop for better suppliers or prices regularly.
Analyze your company’s buying behavior. Starting with the expense or cost item on which your firm spends the most money each year, look at different suppliers or alternate ways of acquiring that good or service. Twice a year, get multiple quotes on all your company’s insurance plans, telephone and internet services, business supply providers and other frequently purchased items. Institute a policy requiring multiple written quotes for purchases over a certain dollar amount, especially those infrequently purchased goods or services where your staff is less likely to know market rates and conditions. Analyze cost items which are expended regularly and in large amounts and investigate quantity discount opportunities.

TIP:  Implement this strategy as an accounting program executed by department managers and administered by the bookkeeper or controller. Senior management or owner(s) should oversee the process and review the results weekly or at least twice a month. The cost savings and market knowledge exchanged around your company will be worth your time.

Watch for physical receipt of goods, invoice error and duplication.
There are several key phases to the purchases-payables cycle. Not only do you want to make sure that only authorized personnel are making purchases according to agreed policy and specification, but your staff should be checking the paperwork to make sure that what was ordered was actually received. After this approval is given, the invoice should be reviewed to make sure that pricing and extension (number of items times the unit price) calculations are correct. Keep close track of paid invoices and approvals to make sure that you don’t pay the same invoice more than once. Also, always pay from an approved invoice and never from a periodic statement from the vendor.

Pay vendor invoices only when due.
Unless you can obtain a cash discount for early payment, never pay invoices early. If there is no early payment discount, ask the vendor if one is available. Remember, taking a 2 percent discount on purchases has historically generated the best possible return on unused cash, even more so when bank money market rates are low.

Inventory management and control.
If your business has product or supply inventories, develop and maintain specific quantity levels, and keep your inventory moving. In manufacturing, this means having just enough inventory to keep production lines running and meet customer commitments. In retail, it means turning inventory on a regular basis. If your inventory exceeds set quantities or you have dead inventory that has been sitting on the shelves too long, decrease upcoming orders or sell the surplus at cost.

Monitor waste and manufacturing rejects.
Communicate the need to control waste on a company-wide basis and ask for specific solutions from your staff. Simple solutions like controlling wasted office supplies and unnecessary photocopies can help your company’s profitability and cash flow. If yours is a manufacturing concern, examine the rejects bins and discards to see where in the process they occur. It is a good idea to solicit suggestions from the staff and involve them in this process. And remember to reward good suggestions, quality (and safe) work.


Small businesses generally can use all the cash flow help they can get. In tough economic times, these cash management tips can help keep your business afloat.