As an 18-year veteran in the banking and finance world, I believe controlling cash flow — rather than letting it control you –can be the difference between success and failure. I have seen this principle upheld many times in my consultation with business clients.
I have searched the Internet for “for pay” programs that calculate and forecast cash flow, but haven’t been impressed enough with them to post or recommend them to my clients. Some of these cash flow tools are quite expensive and I believe a business owner with average skills in Microsoft Excel can build their own cash flow forecast, customized to their own business needs. There’s no good reason to pay for an expensive program to project your company’s cash flow.
At the core of a good cash flow program is your accounts payable process. Put in place smart management of your A/P, and you’re well on your way to ensuring your a business healthy cash flow.
The premise behind working your A/P is to improve cash flow by decreasing the speed in which you pay your accounts payable. Below are some of the ways to do that.
Negotiating terms with trade vendors: Every industry varies as to customary payment terms for inventory. Make sure you know your industry’s customs. I have a client in the wholesale wine business and while many of their inventory payables are due net 30 or 60, a great many will give him what are called, “depletion terms.” Simply put, when the distributor sells the inventory, he pays for it.
Industries that require a pretty large outlay for inventory often give dating terms, meaning a business pays for inventory in installments. A typical dating terms arrangement is first third due net 30, second third due in 60 days, and third installment due in 90 days. This is something you should ask if you are taking on a new inventory line and will have quite a bit of money tied up in it. Dating terms also work well for seasonal businesses.
If your business is suffering a shortfall of cash and you have a really good relationship with a main supplier, something you can consider is negotiating your short-term trade payable into a note payable.
Slow-paying some of your other accounts payable will help cash flow — but be careful. If it is a trade vendor, make sure you discuss it with them first. You can often negotiate a one-time slow pay if cash flow necessitates it. My best advice is to keep close contact with your vendors. Make sure the critical ones know what your plan is to improve cash flow and to get back to paying them within terms. If your plan has to change, tell them before a payment is due. Many of them understand your circumstances better than you think and will work with you. Chances are, if you are having a tough time, so are many of their other customers.
When it comes to paying other payables like electricity, and phone, figure out the last possible date to pay without incurring a costly penalty or being disconnected. Often, if you have a good on-time payment history, these type of vendors will allow you to arrange a payout of a particularly large bill. Don’t be bashful about asking. The worst response your vendors can give is “no.”