Don’t let cash flow stunt your abilty to grow

We all know cash is king. But when it comes to business failure, cash flow mismanagement is largely cited as the number one reason why.

While there can be a variety of issues that create cash flow problems for any business, one of the primary issues is converting sales to cash. Or, in other words, collecting from customers on a timely basis. 

Business leaders are sometimes distracted by the excitement and allure of top line revenue growth — SALES! They set goals, measure results and celebrate wins. But they’ve taken their eye off the ball. Cash. 

Sales don’t mean anything if the cash doesn’t come in.

For businesses that are selling on terms, there are a number of commonly overlooked and undervalued steps that occur after the sale that directly impact cash flow.

Without proper follow through and oversite, the conversion of sales to cash will become sluggish and the business will risk the possibility of non payment leading to bad debt.

Three of the most common mistakes that directly impact cash flow:

1. No credit policy — Selling on terms means that you are providing the financing for your customer in order for them to purchase your service or product.
      A credit policy provides parameters to set appropriate limits in order to accommodate your customers’ needs while preventing delinquency or non-payment.
      Setting credit limits starts with collecting information from each customer which may include financial statements, bank and trade references and credit reports such as Experian or Dun & Bradstreet. A credit policy is only as good as the information used to set up the facility.
      Proper credit management ensures that your customer has the ability to pay for the products and services you are financing. 
2. Absence of process — There are many steps that need to take place in order for a sale to convert to cash. Those steps are often not given the attention they deserve.
      There should be processes in place to ensure that invoices have the correct purchase order number, price and billing address. There should also be a process for follow up on all invoices that become past due, detailing the first step, scripts, how and where notes should be recorded and when an issue should be escalated and to whom.
      There should be the same attention to detail and quality with billing and collection processes as there are with manufacturing, service delivery and sales process. Having processes in place minimizes issues down the line and improves the health of your accounts receivable.
3. No accountability — Often there is no one person who owns sole responsibility for keeping up with past due invoices. Many businesses operate under the assumption that their sales will automatically convert to cash. When that doesn’t happen they are slow and clumsy to react.
      Whether a collection issue or billing issue it is often expected to be handled either by committee or by the salesperson with the relationship. Worst case scenario, the business owner is making a call. In most cases this is not the best practice. The same parties engaged in the conversations regarding sales are not necessarily the ones best suited for the conversations that you have when collecting your monies.

When the accounts receivable duties are bundled with other responsibilities, it’s typical for the accounts receivable duties to be tabled. Often times they are slighted for “more important” tasks. There should be a staff member whose primary duty is collecting your receivables. Any departure from that primary duty should be AR related. For example, creating necessary credits or conversion of customers’ payment method.

By assigning responsibility to someone, that person can be trained on a process and held accountable. Having said processes in place also creates measurables in both performance and capacity to ensure that the proper time and effort is being dedicated to collecting your monies.

Cash flow management requires proper follow through of critical processes that occur after the sale. Keeping track of cash flow is critical to the health of any business. Being intentional about billing and collections is the first step. The more efficiently you can convert sales into cash, the better your business can grow.