Improve Cash Flow

Ask Andi: I thought we’d improve cash flow this month. But we’re still playing catch up on last month’s billing. It seems like we’re always late getting our invoices out the door to customers, and then it takes clients forever to pay us. Any Advice?

Thoughts of the Day: Improve cash flow and grow consistently. Many companies these days stretch cash flow. Good for them, bad for you. Invoice clients in advance. Be clear about what they pay for. Track cash in real-time. Monitor how employees record their hours. Late reports and hours not billed could be harming your company.

Improve cash flow

Think through the cash flow cycle. Any delay getting an invoice to the client delays payment. Clients often work on an urgency and expediency basis. They are most likely to pay vendors who still owe them work. Get on top of invoicing, and insist on payment within 3 days of the original invoice date, not the receipt date. Make sure you have over 60 days in reserve funds so you can weather the cash flow on 30-day terms.

Here is a typical cash flow cycle. Employees do work (week 1). Get paid salary every two weeks (week 2). The month ends in another 2 weeks (week 4). Accounting puts together invoices a week after the month-end (week 5). Follow up with employees on late submissions and incomplete reports (weeks 6-7). Accounting sends client invoices (week 8).

The client tags incoming bills for payment within 30 days (week 12). Clients cut checks, send them by post (week 13). Some clients negotiate longer payment terms: 60-day (week 17) to 90-day terms (week 21+). Since employees were paid weeks 2-3, you floated payroll for 2 ½-5 months. Improve cash flow.

Flexible payment options can be important

Explain the payment cycle to your employees. Don’t assume they understand the impact of their delays in recording hours worked. Prepare a report of billed hours, so that each employee can see how productive they are. Enlist employee support in cutting time out of the billing cycle and making sure that all hours worked are appropriately recorded and invoiced to clients.

Differentiate between good clients and disasters waiting to happen. Customers asking for 60-90 day payment terms, or more, are not usually good clients. They have little or no regard for the harm they may be inflicting on their vendors by delaying payments instead of responsibly paying their bills on time. They may also be signaling that they have a problem with cash flow of their own, which makes them a riskier bet. Payment in full could be in jeopardy if they run out of money. If your company cannot collect on invoices, your company just worked for free.

Improve companies’ liquidity

Some clients have an overly powerful purchasing department. Purchasing stands in the way of allowing direct negotiations between your company and the buyers who need and want what your company produces. This can mean the client loses sight of the value and quality your company provides. You may also end up with an additional cost burden added for shipping, receiving, holding goods, etc. Expect downward pressure on overall prices as purchasing pits your company’s bid against a competitor’s offer.

Once you’re sure you have the right client, move up the billing cycle. Send clients bills for anticipated hours. Get a deposit. Get into the bill payment cycle early. Send the client new statements of work anticipated, in order to refresh the deposit as work is incurred.

Automate notices to clients. Have statements go out every 2 weeks. Make sure they’re going to the person who has the authority to pay the bills. Follow up with a phone call to verify receipt, clarify that there are no discrepancies, and get a promised payment date.

Looking for a good book? The Lean Accounting Guidebook: How to Create a World-Class Accounting Department, by Steven M. Bragg.