Improving Profit Through Better Cash Management
A colleague of mine used to say that there were 3 reasons that companies went bankrupt:
Companies go bust because they run out of CASH, yet many managers and business owners do not give this enough attention.
Two areas of the business that can tie up cash are Receivables/Debtors and your Inventories/Stock.
How well are you managing these two areas? Try these questions for a start.
1. Do you have an objective for the management of Receivables?
Do you calculate your Receivable days and how does it compare to your terms and conditions?( E.g. if your Receivable Days ( formerly Debtor Days) comes to 90 days and your terms say 30 days – you have problems!!
How can you get paid if you do not issue the invoice? This is even more vital if you run a service business because peoples’ memories can be unreliable and the longer the delay in issuing the invoice, the more queries you will probably receive.
3. Do you clear disputed items promptly?
How many times have customers or clients used a query on a small part of the invoice as an excuse to delay payment of the whole amount? Ask them if they are in agreement with the rest of the invoice and get them to pay the non-disputed amount while you investigate their query.
4. When did you last review your credit terms?
They are not set in stone, so shorten them but ensure you inform your customers. Often small business is at the mercy of big business’ payment terms. Do you know by what date your key customers need to receive your invoice in order to get it processed for payment in that month?
5. What follow up do you undertake?
If you do not chase, some will take advantage. Good customer relationships can play a big part but for the slow payers you may need to be persistent. You could always try some different approaches – apparently there was one collection agency that used to send smelly tramps to sit in customers’ reception areas until payment was forthcoming! An alternative? A rumoured approach from Germany in the 90’s where collection agency staff were employed to dress up in pink bunny suits and Ray Bans and stick by targeted slow- payers until they cracked! One target apparently ignored the rabbit for 3 days!
Remember – a customer who does not pay cannot be your best Customer!
1. Do you have an objective for the management of Inventory?
How many days stock do you need to hold? What are your current inventory levels of raw materials, WIP and finished goods and do you closely monitor their levels in relation to your sales?
2. Do you have a clear strategy?
Are you holding one of everything or do you have a limited number of fast moving lines? If you are a FMCG company, remind yourself of what the “F” is supposed to stand for! Do you know the “stockturns” for each line?
3. How big is your warehouse?
How much is it costing you? Imagine moving to a warehouse one eighth of the size of your present one – as one company did. It would save you an enormous amount of money and whilst it would be hard at first – your business will adapt and manage if forced to do so.
4. Are you guilty of keeping JIC inventories – rather than JIT?
Most of you will have heard of “Just in Time” – where you do not hold inventory but get your suppliers to deliver it JIT straight onto the production line. This requires an efficient production process and reliable suppliers. What about all the stocks you are holding JIC – “Just In Case”? Challenge yourself as to the real probability of them being required. Be strong and get rid of them – they are taking up costly space.
5. Are you holding any obsolete inventories?
Again, if they are obsolete, cut your losses, clear them out and free up the space.
This is not an exhaustive list but a start. Remember that money tied up in these two areas is dead money. Recognise the importance of cash to run your business and positively manage it.
However if I spot any pink rabbits in Ray Bans, I will know what they are up to. I just hope they are not following me!
Cherry Birch
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