Reverse English, for those of you who managed to avoid a misspent youth in the neighborhood pool hall, is a shooting technique that imparts a spin to the cue ball, causing it to return to its original place on the billiard table. This effect is used to set up subsequent shots by keeping the cue ball from being encumbered by the remaining balls in play.
The analogy has merit in the discussion of cash flow. Any business requires cash to perform its day-to-day functions. Typically, cash is generated by the sales of goods or services. Cash flow results when invoices representing the cost of these goods and services are paid by the business’ customers. Think of the billing process as the original “shot” and the returning cue ball as payment of the invoice. In this context, your business isn’t getting first-class cash flow if you fail to put the right spin on the ball. The business equivalent of reverse English is cash flow management.
Cash Flow Management
Any experienced business professional will acknowledge the complexities associated with exceptional cash flow management. It, like billiards, is a balanced combination of art and science. Much transpires between the sale of your goods or service and payment. It is incumbent upon business professionals to thoughtfully evaluate every step of the process, from the moment of sale to the receipt of payment.
This is not only a cash flow management concern; it is a customer service concern. This is why cash flow management is so deserving of attention.
What Is Cash Flow?
Cash flow comes in two flavors. Cash flow can be positive (this is sweet) or it can be negative (which is bitter). In simplest terms, positive cash flow exists when the total income from the sale of goods or services, plus invoice payments, exceeds the total expenses incurred in running the business in the same time frame, typically one month increments.
Negative cash flow is the opposite. This occurs when the cost of operating the business exceeds the cash received from the sale of goods or services plus payments from invoices.
From this simple analysis, it is clear that good cash flow management is a combination of effective marketing, robust sales, and timely invoice payments. Cash flow management is therefore a three-legged stool: marketing, sales, and collections.
Marketing and sales are not my core competency, so the focus here will be on invoicing and the collection of the money invoices represent. To that end, here are…
Five Ways You Can Improve Cash Flow
Invoice Accuracy
- This may seem like a “no-brainer” but, this is your first professional contact with your customer post sale. Try to think of your invoice as an ambassador for your business with respect to the customer.
- The invoice should be accurate in every regard.
- To facilitate prompt remittance, canvas your customers to determine the information they require on an invoice to facilitate payment. Make certain you have the customer’s correct billing address and, for goodness sake, spell their name correctly.
- Make it your practice to invoice the same day the transaction occurs. Invoicing electronically makes this easier to accomplish and it has the added advantage of being cost effective for your business.
- Design your invoice to highlight the:
- Total amount due
- The date it is due
- The payee (your business name)
- The payee’s address (your business address)
- Lastly, avoid displaying the total due as an aging of receivables. Showing ‘X’ dollars at 90 days past due, ‘X’ dollars at 60 days, etc. only serves to encourage the customer to make partial payment. Your goal is to collect the full amount due!
Make Things Easy
- Don’t make paying an invoice a chore for customers. Provide multiple payment options such as credit card payment and electronic transfers.
- If margins permit, consider offering discounts for early payment. This has the potential to move your invoice to the top of the pile. Getting paid more quickly can offer your firm a competitive advantage.
Make Things Tough
- Making invoices easy to pay and encouraging customers to pay early via incentives does not always result in the desired outcome. Take some proactive measures such as contacting your clients’ accounts payable department to ensure they have received your invoice and that they have all the information necessary for payment approval.
- When an invoice reaches past due status, you must act swiftly to determine why the invoice has not been paid and what mutually agreeable arrangements can be made to clear the invoice. The biggest mistake you can make is to delay contact. Too many business owners delay action on past due receivables because they fear losing a customer. Remind yourself that a customer who doesn’t pay for the goods or services your business provides doesn’t contribute one cent to your bottom line.
Manage the Process
- Establish policies and procedures for managing the accounts receivable process.
- Ensure that your accounting system can produce management reports that allow you to monitor the results. Remember the axiom “Inspect what you expect.”
- Don’t shortchange the collections function. Allocate the financial resources necessary to the job.
Always Have a Plan “B”
- No business is exempt from encountering a rough patch. There’s no shame in that. The shame lies in being unprepared. Establishing a relationship with a factoring firm is an excellent plan “B.” I invite you to learn more on the subject of invoice factoring and invoice financing here.
Concluding Thoughts
With the day-to-day challenges every small business owner faces, it is understandable why accounts receivable may be pushed down the priority list. We hope this serves as a wake-up call to those of you tempted to minimize the importance of managing cash flow. Knowing how much cash is on hand and what demands the business will make on it is critical to the successful operation of your business.
About Andrew Cravenho
Andrew Cravenho is the CEO of CBAC Funding, an innovative invoice finance company. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow.
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