The number one mandate of any business is to survive. This mandate supersedes any other. An organization must generate enough cash flow to meet its obligation such as payroll, taxes, and payment to trade suppliers and avoid being insolvent.
During negotiations with many debtor companies, the #1 response we typically hear is “We had tons of orders- I don’t understand why I’m in trouble”. These “successful” business people become insolvent because they simply didn't have enough cash to meet operating expenses, including the added cash requirement that increased sales generates. Without adequate cash planning these debtor companies were not capable of meeting payroll and the purchase of raw materials to meet the sales demand.
With any business the cash cycle looks like this:
Cash is used to buy raw materials or pay for services rendered in the production of the final product or service. The sale of the goods or services produces cash and accounts receivables. When customers pay their bills, the accounts receivable goes down and the bank balance increases. Unfortunately the cash doesn't usually come in the same month as the sales generates.
If a business finds itself short of cash, the options are:
- The owner can inject more cash into the business.
- The business can use a pre-existing bank line of credit.
- The business can slow its payments to trade suppliers.
- Sale of fixed assets.
- Sale of non-current inventory.
- Issuance of company stock.
One of the easiest methods of raising some fast cash flow is to ensure you are collecting money from your credit customers in a timely matter. Your collection efforts should include a systematic and consistent follow-up. This is vital to the establishment in the credibility of your credit terms in the minds of your customers. Time is of the essence when credit and collections are concerned. To be effective one must follow-up diligently. An accurate, timely report of your aged trial balances is crucial to the efficient control of collections and release of new orders.
Putting a customer’s order on credit hold is an excellent way to get their attention. Prompt contact with your customer in a professional, tactful manner usually produces the desired effect. Make sure you respond quickly when your customer pays his account to make sure there are no delays with their next order.