Poor cash flow causes even growing businesses to fail because they have to pay their suppliers before they can receive payment from their customers at an increasing rate. Failure is almost inevitable if coupled with excess and obsolete inventory and inefficient processes.

 

The first place to look for improvement is in accounts receivable. Bring past due customers within terms. Also, look for ways to improve terms that result in getting paid sooner. This is especially important with customers that are paying in excess of 30 days. Usually, negotiating better terms from a customer will mean providing an incentive. Make sure to do your homework to determine what would be a win for you and your customer.

 

Another good place to improve cash flow is with suppliers. Negotiating later payment dates can help bring the date you have to pay bills closer to when you get paid from your customers. Again, do your homework to know what a win is for you and your suppliers. In this business climate, keeping good suppliers is very important as there are fewer and fewer suppliers of some products.

 

Many times cash flow is impacted by having excess and obsolete inventory. Excess inventory can tie up significant cash while just collecting dust in your business. The number of raw materials and quantities in inventory need to be balanced between cash flow, necessary design requirements, adequate levels for continuous production, and potential savings of larger orders. This is truly a balancing act. Becoming out of balance in any one of these can significantly affect your business. Also, excess inventory can lead to obsolete inventory. Obsolete inventory can be minimized with good inventory control and communication between departments. Sales and customer service need to alert purchasing to any changes in customer needs so purchasing can have good forecasts by which to make decisions. Any obsolete inventory should be repurposed if possible or sold to get some value out of it.

 

Inefficient processes also cause cash flow problems by requiring extra processing that increases the amount of time to get paid. More processing also increases the costs, especially labor, of manufacturing the products.

 

Improving cash flow requires discipline in multiple aspects of your business. Making it a priority will have a significant positive impact on your business.