Hurrah! You just landed a new large project that will help you grow your business. Now, how are you going to pay for it? You need to process and produce the order, cover the cost of your materials, and you may not get paid until 60 days after you ship and invoice.
Many businesses report that their order-to-cash (OTC) cycle — the time from initial order to invoice payment and application — is longer than they’d like. Big surprise, right? Causes of extended OTC cycles can include manual entry, too much slow-moving inventory, and even customers’ intentional behaviors aimed at stretching payment terms. Motivating your staff or speeding up production to facilitate quicker remittance can only go so far, but there are other ways to shorten your OTC cycle and improve your balance sheet strength.
Consider this: Even though 80% of B2B sellers require payment on credit sales within 30 days, the average days sales outstanding is currently at 50 days (Gartner Research). The situation is much worse for small and medium-sized businesses, who are waiting an average of 72 days, according to the Asset Based Finance Association. That’s why reducing the time it takes to receive revenue from the sale of your products and services is critical; a large number of small business failures are attributed not to a lack of sales or a shortage of winning ideas, but cash shortages caused by extended OTC processes.
Simple Steps to Maximize Cash Flow
Below are some simple steps that can help improve your working capital position, making more cash available to invest in your business in ways that could provide a better return on investment.
Keep inventory management in mind
Some of the best-run companies I visit have limited amounts of inventory. They find ways to have on hand only what they need to fulfill customer orders in the short-term, instead of stocking large amounts of inventory in expectation of incoming orders. I often see companies that have an enormous amount of cash tied up in inventory with plans to eventually use it, but no definite idea of when. This may be less of an issue for businesses that are not borrowing; however, large amounts of inventory ties up valuable floor space, and the money spent on materials could otherwise be invested for a higher return (such as equipment to help automate). Some of my clients have experienced 20-25% sales gains in a given year and been able to reduce borrowing because they focused on driving down their inventory.
Negotiate supplier discounts or longer terms
Working to improve cash flow isn’t just focused on your customers. As a customer yourself, if you’ve been working with suppliers for a long period of time they may be open to offering you discounts or extended payment terms, based either on your loyalty or order size (or both). Given it seems a bit more difficult to negotiate discounts today, we are seeing companies having success in getting extended terms when they are bringing new business to a supplier.
Make sure your line of credit is “right-sized”
This is especially true for seasonal businesses that require funds to stock inventory but may need to tap into their credit line during inventory build periods. Work with your bank to manage use and size of your line appropriately. This is so important for seasonal or quick growth companies, because they can burn through a lot of cash when their balance sheet expands during heavy growth. I have a great tool to give visibility to your cash flow needs that I’ve used with a number of clients. Please feel free to reach out — I am happy to share and walk you through it.
Accept credit card payments
Want to get paid faster? Credit card payments typically hit your bank account within a couple days, while the average OTC cycle for non-credit-card payments for small-to-medium businesses is 72 days! For most businesses, if you can improve OTC that dramatically, it’s worth the credit card transaction charges — especially if cash flow pressure is a critical pain point.
Establish strong collection efforts
Set clear terms and follow through on them. If you’ve set an interest charge for late payments, use it to encourage timely remittance. Taking action as soon as the payment is overdue can also help enforce the payment terms and discourage any repeats.
Accept — and make — electronic payments
Accepting electronic payments is likely to shorten the time between invoice and receipt; paying electronically allows you to more closely control your cash. Compared to electronic payments, checks cost more to process, can be more prone to error, are less reliable in terms of posting date and are less secure. Additionally, larger companies tend to pay and want to be paid electronically.
And finally, remember that a truly good customer is one who WANTS to pay you…those are the customers worth keeping.
If there’s opportunity to shorten your OTC cycle and get cash “in hand” more quickly, consider these tips, and talk through your working capital situation with your banker. He or she has undoubtedly provided guidance to companies just like yours and can relate the ways in which they solved their issues.