A four-point checklist for managing your company’s working capital

“Cash is (always) king.”

In a slow-growth economy, carefully managing your company’s cash flow is critical to maintaining the short-term liquidity that is the lifeblood of any business. Having seen many financial statements over my career in commercial banking, I would like to share some ways for you to manage your company’s cash conversion cycle as effectively as possible.

1) Establish and maintain a disciplined approach to managing accounts receivable:

• Bill immediately: Invoice concurrently with the providing of goods or services; any payment terms offered should begin with the date of product shipment or service delivery whenever possible.
• Bill incrementally: Negotiate billable events other than full delivery, such as stage of completion, particularly if the job is large and time-consuming and concrete milestones in the project cycle can be identified.
• Enforce timely payment: Establish late payment penalties as part of the invoicing process – and don’t hesitate to enforce them. Follow up with late payers immediately.  We all know which vendors are more lenient, and which ones are not. Don’t earn a reputation as the former.
• Extend credit with caution: Be cautious when providing credit terms to new customers. Always check their financial background and references; similarly, periodically review existing customers.  (See resources for conducting trade credit references)

2) Convert to an electronic accounts receivable and payable system

• Pay faster and more accurately: An electronic receivables system using the Automated Clearing House (ACH) provides far better control of when payments are received. In addition, it may cost less and saves time tracing errors and booking general ledger entries.
• Reduce fraud: Many businesses still use checks, but it’s not the most efficient or safest form of payment. According to the 2014 AFP (Association for Financial Professionals) Payments Fraud Survey, 82% of survey respondents reported that checks were the primary target for fraud attacks at their companies. $23,100 was the typical financial loss incurred by these companies.
• Talk to a pro: Your bank can work with your company on setting up an automated payment system with built-in workflow controls and approvals.

3) Regularly re-forecast your cash flow over a rolling 12-month period and identify any high or low cycles. 

• Borrow more strategically: Use this information to anticipate your borrowing needs, plan proper staffing or boost marketing efforts during lulls. A line of credit is an affordable and practical way to cover short-term cash needs. You only pay interest on the amount borrowed.  Revolving your line of credit helps build confidence in your banker.
• Know when to take out a loan: Establishing longer term borrowing arrangements for fixed asset expenditures will allow your line of credit to maintain its purpose of meeting temporary borrowing needs.
• Pay down your obligations: If you are generating more cash than you use, make a plan for the future – consider prepaying loans and thereby generate borrowing capacity for future initiatives.

4) Hang on to your cash as long as you can – without damaging your reputation with suppliers:

• Pay with your card: Use your business credit card to make purchases or pay suppliers. The typical grace period is 21 days after receiving your statement. Some cards even have cash back or other rewards.
• Negotiate your plan: With major suppliers, you may be able to negotiate a more flexible payment schedule. The time to approach the supplier is when placing an order.
• Speed it up: Take advantage of discounts for prompt payments if offered.

Use this checklist to understand your own operations and identify the best working capital management plan for your business.  I have seen even small adjustments make a difference to a company’s bottom line. Not only does your business benefit by increasing your available cash, it also increases your access to credit by improving your business operating performance—making your business more attractive to lenders.

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