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Business - 3 min read

If revenue gains have been hard to come by for your business, you may be looking for innovative ways to increase your cash flow. The cash flow formula is simple enough: collect more receivables and slow down your payables. But the how-to of this formula can be anything but simple.

A quick fix for cash flow problems is to stretch your payables for another 10 days or so, but this can cause longer term problems. If you pay with a credit card in order to extend your payables, your vendor still gets paid, but you start to collect interest charges, which simply extends and compounds the problem.

Let’s look inside the mind of a CFO to learn some other strategies for increasing cash flow.

Evaluate Your Collection System

If you’re looking to shorten your receivables period, evaluate your collection system with the following questions:

  • What is our collections activity?
  • How long does collections take?
  • Do we find disputes quickly?
  • When we find disputes, how are we resolving them?
The answers to these questions can help you to find problem areas in your collections system. You may need to enforce payment discipline in order to keep your cash flow healthy. This will help you to pay your own vendors on time and build healthy relationships with them.

 

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Create a Thorough Forecast

One of the common problems that small- and mid-sized companies encounter is that they’re not prepared for all the costs they incur when they grow at a fast rate. A sudden steep increase in sales may mean you’ll need more inventory and possibly even more employees, but will you be able to make up for these extra costs with the increased revenue?

A thorough forecast can help you to avoid being blindsided by the cash flow problems that accompany rapid growth. For most companies, a rolling 12-month forecast is the best tool. It can help you to start mapping income and expenses week by week so you can anticipate surges in expenses as well as surges in revenue. You can then break up large payments so they’re not all due at the same time.

 

Evaluate Customer and Supplier Terms

Another area to pay special attention to is the terms you currently have with customers and suppliers. For instance, if your average payable term is 24 days but your average receivables term is 44 days, that’s 20 days that you have to float. In this case, you’ll need to find more capital.

The best case scenario is to balance the terms you’re offering customers to the terms you get from suppliers. If that’s not possible, do your best to narrow the receivables-payables gap, even if you have to renegotiate terms or switch to different suppliers.

 

Make Cash Flow an Overall Priority

Cash flow should be a priority for all businesses, make sure that all of your employees understand that. If your employees are setting goals to help improve cash flow, you have a much better chance of attaining that goal.  From your salespeople to your collectors to your managers, everyone can make improved cash flow a priority in their own way, and all of these efforts will add up to success.

Our business advisers have the experience necessary to help you to improve your cash flow. Feel free to contact us for more information about cash flow or any other business finance concern.

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