Often business owners find they have met their sales budgets but cannot understand why this isn’t translating to increased cash flow. There are a number of explanations for this – two common ones relate to accounts receivable and stock. Here are five tips to help you translate good sales figures into cash in the bank.
Chase up debtors
How often do you review your debtors ledger? Do you chase up your customers if they haven’t complied with your payment terms? It’s great to achieve forecasted sales numbers, but if sales aren’t paid for at the end of the month, it’s not helping your cash flow at all! Have a look at your debtors right now, were you aware that you had that many invoices outstanding?
At a bare minimum, you should run a debtors report at the end of each month to see which customers bills are still outstanding – you may be surprised at how slow some of your key customers are at paying! If they can get away with paying a little bit late, they may take advantage and stretch your kindness to the maximum.
Deal direct with customers’ accounts payable staff
Having a contact person within a customer’s accounts payable department is vital to ensuring your invoices are paid. As you review your open invoices, you can send a quick reminder to the appropriate person, who will be able to action your request much faster than if the request is received by someone external to the department.
Reconsider arrangements for slow payers
Identifying your slow paying customers could prompt you to reconsider your payment arrangements with them. It may be an idea to only issue your stock if they pay on order, rather than via the usual terms. Such an arrangement benefits you as you do not have to constantly chase them up. You may find that these customers are not worth having and you’d be better off selling your stock to a more reliable customer who will pay you in accordance with your terms.
Evaluate stock on hand
Speaking of stock, did you do a stock count at June and faint at the amount of stock you had on hand? It can be dangerous holding large quantities of stock; the risk of obsolescence becomes a critical issue.
It can be a hard trade-off between keeping enough stock on hand to cope with customer orders and having too much stock on hand that some never get sold. Do you really need six months supply of one item at a time? This can seriously impact the amount of cash you have in the bank.
Review stock ordering
Perhaps your suppliers offer you volume discounts. Is the 5% saving for purchasing in bulk worth it if at the end of the year you end up marking down 20-30% of this stock just to get it out the door? Sales are important to build customer relationships but if a sale is needed because you purchased too much of one item, then it is vital you review your stock ordering process. Marking down stock by 50% means you have said goodbye to 50% of the revenue (and in turn cash) that was meant to come your way.
Of course there can be other reasons why your sales forecasts haven’t turned into cash on hand.
If you would like to discuss other ideas to improve cash flow, please don’t hesitate to contact Accru at any time. Our business management experts will be happy to help.
By Sarah Dodgshun, Accru Melbourne