Each day you open your doors, you spend money on electricity to boot up your computer and employees to answer the phone. Each day you do not collect cash from sales, you move closer to negative cash flow.
Of course, maintaining a healthy stream of working capital is more complicated than that; still, you should always be implementing strategies that keep your business closer to the ideal ratio of $2 in assets to $1 in liabilities.
After you have reached a point in your timeline where you can pay all of your suppliers on time, the next step is to start leveraging better deals. You can begin by taking advantage of any existing cash discounts offered by paying your vendors within a certain time frame.
Encourage your purchasing department to always look for better contract terms and deeper discounts. Many distributors will offer tiered pricing based on the quantity you order, but take care not to buy more than your sales team can offload.
Keeping your other expenses within reasonable limits will not hurt either. It is probably not worth the scrutiny to pinch of few pennies on a box of pens, but evaluating the necessity of major purchases can help foster a frugal mindset.
Just as taking advantage of early payment discounts can help you save money, offering similar incentives to your customers can help you get paid more quickly. If your customers’ payments regularly run past due dates, you might also consider implementing a program that rewards your receivables staff or account managers for collecting outstanding balances before they are late.
It is never too late to start analyzing the creditworthiness of your customers, either. Establishing appropriate credit limits and terms can help you manage your outstanding AR ledger well before it gets out of hand. If you have considerable issues convincing your customers to pay on time, you might have to resort to methods such as late-payment penalties or cash-on-delivery terms.
Use the Excess Wisely
Now that your average daily working capital has reached an abundant level, and you have about six months’ worth of expenses as your safety net, it is time to decide how to reinvest the excess. Whether you choose to upgrade your facilities for a better workflow or invest in a marketing campaign to win more clients, it is crucial that anything you do ultimately increases your bottom line.
A negative cash flow can spell disaster for any company. Keep your business healthy by maintaining enough working capital to cover all of your daily costs.