A Strong Cash Flow Begins With Your Customers

Check your receivables

First look at when your customers are paying you. Yes, improving accounts receivable (A/R) collections is generally the most immediate way to improve cash flow.

Review industry norms when it comes to payment schedules. If you’re requesting payments later than your competitors are, it may be time to shorten your cycles to get money coming in faster. Step carefully with your most important or largest customers, however. You don’t want to rock the boat unnecessarily.

Re-evaluate your technology, too. Many, if not most, companies have implemented an automated collection system that generates invoices when work is complete, flags problem accounts and generates useful financial reports. If your A/R system is out of date or underused, your cash flow may suffer from a lack of pertinent information and poor follow-up.

Last, a word on collection agencies. A customer sent to collections is likely lost forever, plus unlikely to serve as a positive referral source. And third-party fees may consume much of the collected amount.

So customers should be sent to collections only if these consequences are acceptable — which may be the case in a variety of circumstances. For example, if you have chronic collection problems with a customer, you may be better off collecting what you can now through an agency and not having to deal with the customer in the future.

Come up with a set of “must send” criteria that soundly and objectively drive your decision. Also, remember that you typically may write off an uncollectible outstanding debt as an ordinary business expense on your tax return as long as it’s properly documented.

Strengthen your relationships

It’s not unusual for most of a company’s cash flow to originate from a handful of key customers. Ideally, this wouldn’t be the case — you would have a large stable of dependable payors that rarely complain and speak highly of your products or services at every opportunity. But, particularly for smaller businesses, this ideal is hard to reach.

For this reason, another way to promote cash flow is to strengthen your relationships with key customers. You may not necessarily increase your flow, but you may stabilize it. For example, look into whether you can offer value-enhancing add-ons (helpful information, discounts on other services) to select customers. Also, offer rewards for referrals.

Special (lower) pricing for key customers is another way to keep your best payors in the fold. But don’t cut margins so low that even the slightest mistake could trigger a financial disaster. And avoid price wars with competitors, because such endeavors can ultimately lower profitability — even if you’re the “winner.”

In addition, refocus on customer service. Although maintaining and, if possible, boosting cash flow is important, be sure to consider how any related decision will affect customers. One way to ease procedural or service changes: Empower employees who most frequently interact with customers with the authority to make things right should confusion arise or a mistake occur. This is something that often falls by the wayside when, for example, businesses make staffing cuts to lower payroll costs and preserve cash flow.

Market yourself wisely

Another group of customers who could help your cash flow aren’t really customers at all — at least not yet. They’re prospects. And to haul them in, you’re going to need to undertake some marketing efforts. Before you start marketing to anyone, however, pinpoint the type of prospects you’re looking for. Specifically, estimate what your net profit will be after subtracting your cost to serve a prospect.

Prime targets should be those who will likely buy a substantial volume with enough frequency to provide a steady revenue stream over time rather than those who may be one-time or infrequent purchasers. They also should be potential targets for cross-selling other products and services.

Naturally, you’ll also need to conduct a cost-benefit analysis of any marketing campaign. Granted, you have to, as the cliché goes, spend money to make money. But it would be counterproductive to hurt your cash flow long-term in an effort to strengthen it.

Recently, social media platforms such as Facebook and Twitter have beckoned companies as low-cost marketing tools. And, indeed, they can be useful in maintaining your visibility with existing customers (assuming they’re tech savvy) and promoting your knowledge in your field. But, generally, social media is, by definition, a “mass communication” platform. So it isn’t likely to snag you that one big customer. For that, you’ll need a more carefully targeted campaign.

Begin at the beginning

By this point, many companies have trimmed their operations and workforces to the extent possible. So, instead of looking to boost cash flow by cutting more costs, go back and begin at the beginning. The dollars your business earns originate with your customers. So look to nurture and grow those relationships as much as you can.

Where is your cash going?

Before you or any business owner can identify ways to improve your cash flow, you need to ask a simple question: “Where is our cash going?”

Begin by going line by line through your annual budget and reviewing all of your company’s expenditures. If you’ve been too busy to maintain a budget, it’s probably time to reinitiate that effort. Although budgeting can be tedious, it’s critical to sound cash flow management. Having a sensible budget is helpful strategically as well, enabling you to ensure that your spending decisions align with your company’s goals.

You should also create a cash flow statement. This is a report specifically designed to track your company’s net increases or decreases in cash. It factors in the revenue inflows and outflows of daily business operations, asset purchases or sale proceeds, and financing activities. And because the report excludes noncash accounting items, you can use it to pinpoint cash flow problems before they get out of hand.

Ideally, you should generate a cash flow statement monthly. But creating it quarterly or even annually is better than not doing so at all. Ask your CPA for help getting started. In many cases, you can use your accounting software to maintain a cash flow statement once it’s been formatted.

Please contact Feeley & Driscoll's Boston Accounting team by Email or call us at 1 (888) 875-9770.

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