Is your business consistently profitable but somehow still tight on cash month after month? Do you find yourself continue to sell more and yet not having any more cash to show for it? If your company is profitable but your bank account is still coming up short, here are three places to examine.
Accounts Receivable. It is no secret that customers that pay late will hurt your cash flow, but you should also determine whether the terms you are giving your customers are too generous. If you are currently giving customers 30 days to pay, what would happen to your cash flow if you reduced that to 15 days? Some industries give more generous payment terms in order to stay competitive but will incentivize customers to pay early with small discounts. Determine which approach is appropriate for your business.
Also, be cautious about “hidden receivables.” These are typically caused by waiting a few days to invoice a customer. Every day that passes without invoicing has just extended your receivables days causing your net 30 terms to turn into net 35+ terms. Not only that, but the longer you wait to invoice a customer, the more likely it is that you will forget to do so.
Accounts Payable. We looked at your payment terms for customers, but what payment terms are you getting from your vendors? If we want short payment terms for our customers, the opposite is true for our payment terms with our vendors. If payment in advance or cash on delivery is currently required from your vendors, ask if they will offer more favorable payment terms. They too are trying to stay competitive and may be willing to change payment terms if you ask.
Inventory. Inventory sitting on the shelf equates to money sitting on the shelf, unable to be used. If you are a business that has inventory, pay attention to your inventory turnover—that is, how long does it take for your inventory to sell? The longer it takes, the longer your cash is tied up. If your inventory is taking a long time to turn, it is typically due to the following factors: it is the wrong kind of inventory and/or it is too much inventory. If you find that your inventory is moving slowly, identify which factor is causing it and respond appropriately. This could mean selling slow moving product at a discount in order to get rid of it and free up cash to purchase new, more desirable inventory.
An unprofitable business can survive, at least in the short term, with cash. Unfortunately, a profitable business ceases to exist without cash. Understanding what impacts cash flow allows business owners to make decisions that not only keep their business open, but allow it to grow.
Valerie McElveen, Area Director, UGA SBDC at Georgia Southern University