Monday’s Wall Street Journal (9/24/07) has an article in the ‘Small Business Link’ (B4) titled
“Three Approaches to Reining in Customer Debt.” by Simona Covel. The three approaches discussed include:
– Cut off offenders
– Tie sales commissions to payments
– Establish formal policies
This article got my juices flowing on the subject of cash flow; something which is close to my – and every business owners’ – heart. So, here is my extension of the above advice.
1) Establish formal, documented billing and collection policies internally and with your customers (i.e. past-due x days=Letter; y days = Stonger Letter/Finance call, z days = Final Notice/CEO(Executive) call, z days plus = Cut Customer Off)
2) Communicate your policies clearly to your customers (decision maker and finance group) and your staff and ensure that your policies are clearly defined in your contracts
3) Consistently follow through and enforce your policies, holding responsible staff accountable (i.e. compensation incentives or dis-incentives)
4) Have (and review) a weekly cash flow summary/dash board that lays it all out clearly and logically – available cash, anticipated collections, aged receivables, forecasted payables, etc., over the coming weeks and beyond – as well as last weeks results relative to what was forecasted
5) Establish a “Prospective Customer Fit Profile” – a rating system that identifies key indicators of customer quality and fit including their ability and propensity to pay on time. Then hold sales accountable for bringing in quality customers that pay on time
6) Analyze customer profitability (i.e. quarterly). What is your realization rate on all of the time that it takes to manage that customer? What is your ROI (hard dollars and intrinsic) on the relationship? Be prepared to direct undesirable customers to the door (in a professional manner, of course)
7) Look at the processes, systems and staff accountability that is in place and ensure that you are tracking and billing all services performed (or materials used, etc.)
8) When cash flow is a problem, don’t fall into the trap of Small Thinking – i.e. only focusing on costs… Think Big Picture… What additional revenue is out there? Are you missing opportunities because you or your key people are not spending time doing the right things? Are you and your staff talking with your customers about new products or services? Are there reasons customers are not paying on time (i.e. service or quality issues)?
9) Look at how you are (or are not) utilizing debt. Are you using current operating cash flow to finance long-term assets?
10) Develop a relationship with a good banker (this is different than finding a bank with a commercial lending officer) and take the time to establish a line of credit when cash flow is not critical issue
11) When you are planning, make sure your cash flow forecasts make sense from both a top-down and bottom-up perspective. Top Down: What can you sell and how does the cash (really) flow from those sales versus Bottom Up: What is your production capacity (plus overhead) and what are the timing of those cash flows? Do the two approaches meet in approximately the same place?
…Stop here if you want to avoid some shameless self-promotion
12) There are more than 11 things to do to maximize and manage your cash flow, so number twelve is – Get some help. An independent, experienced set of eyes on your business will turn up opportunities that you haven’t thought of – and can help you implement changes more quickly and effectively.
I have tried to point out that this is not just a numbers issue. Processes, systems, technology, people – and how they work together – all come into play when you are looking a maximizing and managing your cash flow.
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