Have you ever run out of petrol? It’s a sinking feeling when your car suddenly begins to lurch forward, starts slowing down and eventually comes to a shuddering stop. Often, when it happens, you’re within walking distance of a petrol station. You think to yourself: “If only I could just get over this last hill, I would be fine.” Or, “If I could just freewheel these last two kilometres, all would be well!” But sometimes, even though hope is within sight, you simply don’t have enough petrol to get you to where you need to be.
That’s a little how cash flow in your business works. You may have the next cash injection within reach; you may have a lucrative deal lined up for just a few weeks’ time. But if you don’t have enough petrol (or cash) to get you there, the next big thing on the horizon is immaterial. In order to survive long enough to get there, you need to improve cash flow.
A key way of doing this is by making your cash conversion process more efficient. The cash conversion process consists of a number of steps. In order to improve cash flow, your business needs to shorten the number of days in each step. Here are a few pointers to help you proverbially freewheel to the next gas station:
- Step one — The purchase decision and ordering. Help to jog customers into action by periodically creating discounts for a limited time only. Improve cash flow by putting automated systems in place (where appropriate) to decrease the time that it takes your own company to order new stock.
- Step two — Order fulfillment and shipping. Improve cash flow by taking a look at your delivery partners and systems. Optimise delivery routes and ascertain that you are using the quickest possible transport method that is appropriate for your business. For example, are you using post office-to-post office couriers? If so, would it be quicker to use door-to-door methods and would the extra cost be outweighed by the fact that you will be paid more quickly upon delivery of your goods?
- Step three — Billing the customer. Improve cash flow by ensuring that your invoicing system is immediate. Do you generate an automatic invoice when the customer places an order? If not, then you are adding unnecessary time to the cash conversion period. How quickly does the customer receive their invoice? Is it presented to them as the order is placed, does it arrive a day or two later, or does it arrive in the post after an indeterminate amount of time? Decreasing the waiting period here will cost you very little to do and will have a tangibly positive impact on your cash flow. It often just means tightening up your processes. Develop an internal policy that insists that invoices go out within 12 hours of an order being placed.
- Step four — Collection of payment (accounts receivable). Take a look at what incentives you have in place for customers who pay early. Is there a reason for them to pay within 15 days, or are they being treated the same as those who pay in 30? Conversely, what penalties are there for those who pay late? Are they being enforced, or have these terms remained in the fine print of the invoice up until now?
- Step five — Payment and deposit. Improve cash flow by putting easy methods of payment in place for your customers. Even small businesses now have a number of innovative payment options to choose from. Most banks now have instant point of sale applications that can be set up to your cellphone. Your phone becomes a POS point linking up to your bank account. Payment is instant and incurs lower fees than a credit card machine.
Some banks now also offer customers the opportunity to make cheque deposits remotely using their mobile devices. This saves time in that customers don’t need to physically go into banks to make deposits, and improves the convenience of their interaction with your company.
Improve cash flow in your company by scrutinizing each of the steps in the cash conversion process. If you need help with this, contact The Finance Team. One of our highly qualified finance executives will be able to help you tighten processes and innovate around payment incentives. By so doing, you might find an unexpected tank full of petrol.
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