When the Going Gets Tough

When times are tough (and for 90% of businesses its tough right now) then you have to get tough yourself.  When times are good businesses have a tendancy to get fat and lazy.  Just like a person who has been living the highlife businesses can become unhealthy.  The wake up call (and the first and most worrying sign for a business) is cash flow problems.

It’s not rocket science.  When revenues/sales fall below what your monthly overheads are you are deemed to have a cash flow problem.  When that occurs, you as a business owner have to get tough.  Sometimes that means being tough on yourself, your suppliers, your customers, your business.

Businesses that successfully practice good cash management generally survive and prosper during downturns; those that don’t are likely to be undone by the weight of increasing debt and the inability to pay employees and suppliers.

Here are 11 tips that you can action immediately:

1.  Take the maximum time to pay your suppliers whilst remaining within their normal payment terms. Essentially this amounts to an interest-free line of credit, and gives you more time to use your working capital.

2. Check to see if your suppliers offer payment incentives. Some businesses offer a discount for paying early. Even if your business regularly purchases a substantial amount from another company, you’re in a good position to negotiate  favourable payment terms. In addition to early payment incentives, ask for special terms that accommodate your cash flow requirements. For example, negotiate to make payments after your busiest time of the month.

Many suppliers are willing to offer incentives in order to speed up their own receivables and cement long-term relationships with good customers.

3.  On your end, consider offering customer discounts to early payers. Consider providing a small discount when bills are paid within ten days of delivery. It may cost you a little, but it can also light a fire under slow payers – and have a positive effect on your cash flow. However, before taking this step, consider whether you could borrow money you need at a lower cost.

4. Examine payment terms and your billing schedule. If possible, send an invoice with your shipments, not after delivery is made. Waiting until the end of the month can add as many as 30 extra days to your cash flow conversion period. If your business provides a service and it is appropriate, ask customers for a deposit before work begins.

Remind customers of your credit terms. Check your invoices or statements to ensure there is a clear indication of when payment is due. Encourage customers to pay with fund transfers or Internet payments.

5.  Closely track and collect overdue accounts. Have your accounting department prepare fast, accurate reports on overdue payments. Monitoring accounts can reveal early warning signs. Act immediately on past-due accounts and use a collection agency if necessary. Telephone tardy customers and obtain a payment commitment by a specific date.

Don’t keep delivering services or shipping goods when payments are far behind. Put problem customers on a COD system or stop shipments altogether.

6. Consider establishing an interest penalty for late payments. Once a bill becomes seriously overdue, you may have to resort to penalties. While you can, and should, sympathise with hard-pressed customers for a reasonable amount of time, don’t let their problems become your problem by dragging your cash flow down.

7.  Don’t extend credit without taking the proper precautions. Require all new customers to fill out credit applications. Request and check credit references.

A written agreement at the onset of a business relationship can help avoid misunderstandings later on. Spell out the terms of the arrangement on your credit application. You might want to go one step further and have customers sign a separate statement or contract identifying not only when payments are due but also that the other party is liable for any legal or arbitration costs if a bill is not paid.

If your business is extending credit to a financially troubled business, insist on securing personal guarantees from the owners, as well as their spouses.

8. Trim expenses and cut unnecessary spending. Look for ways to reduce waste in office supplies, business-owned vehicles, mobile phones and land lines, utilities, business travel, overtime pay, insurance, and more. Ask your employees for cost-cutting suggestions. They are likely to come up with ideas management hasn’t even considered.

Dispose of unused vehicles, vacant real estate, and machinery you don’t need. You could be paying insurance, maintenance and storage costs on them. Selling idle assets can result in a cash flow boost, while donating to a qualified charity can be smart tax move.

9. Keep your inventory lean. As a rule of thumb, the expense of maintaining stock in inventory averages about two percent of the cost of those goods for each month not sold. If your business carries an item for a year, you’re down 24 percent. It’s hard to overcome this kind of cost handicap – especially in hard times.

Don’t fall into the trap of hanging onto slow-moving inventory in order to avoid admitting you made a mistake. Cut your losses on old and outdated inventory items. Or donate them and claim a charitable tax deduction.

10. Free up cash by leasing rather than buying. Leasing computer equipment, cars, facilities, tools and other equipment generally costs more than buying, but you avoid tying up cash. You can also limit your exposure with short-term leases.

11. Examine prices. Many business owners and executives won’t consider increasing prices in a tough economy because they’re afraid customers will head to the competition. But it may be necessary if your prices aren’t keeping pace with expenses. If you do raise prices, explain the reasons to your customers, and if possible, give them notice.

Emphasise the value of your products or services.

Should you wish to discuss any matters regarding the matters raised in this article please contact Mr John McLaughlin McLaughlin & Associates on 3808 7777.