One of the most common problems for start-up companies is managing cash flow. Cash flow problems can affect both struggling, slow growth companies and successful, high growth companies. Cash for a business is like blood for a person, without adequate flow, both the business and person are unhealthy. By managing accounts receivables and payables, inventory, and product pricing, a company can improve their cash flow, grow and thrive.
An important part of managing cash flow is controlling the company's accounts receivable and accounts payable. Business owners need to collect their accounts receivable as quick as possible. A financial incentive to business customers, such as a 2% discount off invoice for payments made within 10 days, is an effective policy to encourage prompt payment. Also implementing a collection system, with set actions like e-mails, postcards, and telephone calls to the right people to accelerate payments, can reduce the number of days that accounts receivable are outstanding. Any disputes should be aggressively resolved. If some customers continually pay their bills 30+ days late, the business needs to have significant late fees to cover the extra expenses involved in collecting these payments.
On the other side, with accounts payable, withhold all payments until the due date. Transfer the funds electronically to make payments on the last day they are due. If available cash to pay the company's bills is insufficient, call the companies and tell them that payments will be made late, but will be paid on specific date, if possible. By being assertive, the other company's collection personnel will view the company as more responsible than companies that don't respond to their collection efforts.
Too much inventory and slow inventory turnover can also cause cash flow problems. Inventory management, keeping only the inventory needed, helps with cash flow. If some inventory is obsolete or damaged, quickly sell those goods at a discount. This will reduce inventory costs, such as lowering inventory audit times, security costs, and warehouse energy costs. And the cash recovered increases available cash for operations. Another solution for excess inventory is to sell it at a discount to obtain new customers or to reward existing customers. Make sure they know that the sales are a rare promotion. The business can gain new customers, please existing customers, and improve its cash position.
Certain financial ratios are important to monitor receivables, payables and inventory. Average collection period is the average number of days to collect accounts receivables (accounts receivable / average daily sales). Days payables outstanding is the average number of days to pay the accounts payable (accounts payable / average daily cost of sales). Number of days' sales in inventory is the average number of days it takes to sell the inventory (inventory / average daily cost of goods sold). By using these ratios and following their trends, a company can react quickly to better manage their cash flow.
Another common problem for entrepreneurs is pricing their products or services. Selling products for little or no profit will lead to cash flow problems. Proper pricing is difficult for start-up businesses, and many entrepreneurs underprice their products to gain new customers. Companies cannot survive long term with this strategy. Companies should raise their product prices until they have adequate profits, even if they lose some customers.
By managing accounts receivables, accounts payables, inventory and product pricing, start-up companies can improve cash flow, increase profits and grow.
An important part of managing cash flow is controlling the company's accounts receivable and accounts payable. Business owners need to collect their accounts receivable as quick as possible. A financial incentive to business customers, such as a 2% discount off invoice for payments made within 10 days, is an effective policy to encourage prompt payment. Also implementing a collection system, with set actions like e-mails, postcards, and telephone calls to the right people to accelerate payments, can reduce the number of days that accounts receivable are outstanding. Any disputes should be aggressively resolved. If some customers continually pay their bills 30+ days late, the business needs to have significant late fees to cover the extra expenses involved in collecting these payments.
On the other side, with accounts payable, withhold all payments until the due date. Transfer the funds electronically to make payments on the last day they are due. If available cash to pay the company's bills is insufficient, call the companies and tell them that payments will be made late, but will be paid on specific date, if possible. By being assertive, the other company's collection personnel will view the company as more responsible than companies that don't respond to their collection efforts.
Too much inventory and slow inventory turnover can also cause cash flow problems. Inventory management, keeping only the inventory needed, helps with cash flow. If some inventory is obsolete or damaged, quickly sell those goods at a discount. This will reduce inventory costs, such as lowering inventory audit times, security costs, and warehouse energy costs. And the cash recovered increases available cash for operations. Another solution for excess inventory is to sell it at a discount to obtain new customers or to reward existing customers. Make sure they know that the sales are a rare promotion. The business can gain new customers, please existing customers, and improve its cash position.
Certain financial ratios are important to monitor receivables, payables and inventory. Average collection period is the average number of days to collect accounts receivables (accounts receivable / average daily sales). Days payables outstanding is the average number of days to pay the accounts payable (accounts payable / average daily cost of sales). Number of days' sales in inventory is the average number of days it takes to sell the inventory (inventory / average daily cost of goods sold). By using these ratios and following their trends, a company can react quickly to better manage their cash flow.
Another common problem for entrepreneurs is pricing their products or services. Selling products for little or no profit will lead to cash flow problems. Proper pricing is difficult for start-up businesses, and many entrepreneurs underprice their products to gain new customers. Companies cannot survive long term with this strategy. Companies should raise their product prices until they have adequate profits, even if they lose some customers.
By managing accounts receivables, accounts payables, inventory and product pricing, start-up companies can improve cash flow, increase profits and grow.
Les Graham is president of Pomona Foods LLC, a start-up food company based in Cary, NC. He is also currently enrolled in the Master's Degree in Entrepreneurship Program at Western Carolina University. Webmasters and other article publishers are hereby granted article reproduction permission as long as this article in its entirety, author's information, and any links remain intact. Copyright 2011 by Les Graham.
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