Cash acceleration strategies
Cash acceleration strategies
Because cash is king, we thought we would start off the new year by setting out some useful tips on how to accelerate the flow of cash through your business.
Understand your cash conversion cycle (CCC)
Being able to improve how cash flows through your business requires an understanding of your cash conversion cycle. Your cash conversion cycle measures how long it takes for a Rand spent on anything (payroll, rent, utilities, marketing) to flow through your business and back into your pocket. Calculating your CCC often involves breaking your business down into four cycles, namely: your sales cycle, make | production and inventory cycle, delivery cycle and the billing and payment cycle.
Shorten cycle times
Increasing the pace of everything your company does helps shorten your CCC. Examine all the processes mentioned above and find ways to speed up and move cash more quickly through the business.
Here is just one example – many accounting departments are often under-resourced, and there are often delays in getting invoices sent out and collected. Consider billing more regularly (not just at the end of the month as is custom in many industries). Encourage your accounts receivable clerk to also build relationships with your customers. Get them to also be more proactive in collecting money, I.e. phone 5 days before the invoice is due to confirm that the invoice has been approved for payment, and when paid, thank the client for making payment. The cash you generate from implementing any one of the above strategies could pay for an additional finance resource.
Eliminate mistakes and speed up your delivery processes
Nothing infuriates customers more than a mistake. It is the #1 reason why they are slow to pay. Put operating practices in place to finish jobs quickly and ensure that there are quality control practices in place to ensure that an item of work has been completed to the client’s satisfaction before it is invoiced. Have clear processes in place between your accounts receivable team and your operations team to address service complaints where a client is not paying because they are unhappy with the service delivered.
Change the business model
Sometimes collections are not the problem, it is actually creating the right payment terms with customers in the first place. This is where a clear understanding of your CCC is critical. There are many ways to positively affect your CCC by adjusting your business model, the two with the biggest impact, would be modelling your business in such a way that your customers fund your cash flow, or modelling your business in such a way that your suppliers fund your cash flow.
In certain circumstances, it may be appropriate to ask your clients to pay in advance, or invoice in advance with 15 – 30-day payment terms to match your cash outflows with your cash inflows.
118Accounting have many years of experience in implementing cash acceleration strategies for our clients. If you would like to discuss how we could do that for you, then contact us on:
Source: Scaling up – how a few companies make it….and why the rest don’t