Cash Flow Hygiene

“Cash Flow Hygiene” loosely describes the collection of routine and recurring actions a business can take to maximise its control of cash flows.

Most of this stuff is familiar, because it’s common sense. But systems are needed to ensure that nothing is overlooked, and to ensure continual improvement.

Collectively the impact of a number of minor improvements in Cash Flow Hygiene can make a dramatic difference to a business’s liquid cash position.

A Simple Example:

For businesses where Debtors and Inventory have a significant value, relatively small percentage reductions can significantly boost the amount of cash on hand.

For example, a reduction of an average of just 5 debtor days on $2 million annual sales can release around $30,000 cash – definitely an amount worth paying attention to.

[Debtor Days is a measure of the average time it takes to collect your credit sales. It is the result of the formula: 360 ÷ (Credit Sales ÷ Accounts Receivable)]

Here’s a sample of useful “Cash Flow Hygiene” measures:

Why give credit?

Purposely question the need to give credit, and the payment terms you give to specific customer categories. It’s Ok to discriminate based on credit quality.

Have a credit policy, and enforce it.

If you must give credit, decide on the acceptable terms (write them down as a policy, publish it to everyone within and outside your organisation, and obtain a customer sign-off before doing business with them.

Categorize slow paying customers..

..and purposely discriminate against them.

• Adjust the pricing
• Impose late payment penalties
• Ride ‘em ‘til they fall into line – constant regular contact
• Let everyone know, including the sales guys
• Impose stop-orders, (don’t throw good money after bad)
• Sack ‘em and send ‘em to your competitors!

Invoice more frequently

Wherever possible, your invoicing cycle should support your need for cash,

Don't issue statements

If you’re still issuing monthly statements to your debtors – it’s a good time to stop! Define and publish your credit terms as starting from date of delivery, or at the latest, from time of invoice.

Incentives for cash or early settlement.

Early settlement discounts can sometimes be used as an incentive to encourage faster payment by your debtors.

Control purchasing and purchase orders

• have a written policy
• ensure that the timing and quantity of orders is linked to your budgeted cash flow plan.
• set limits of authority, with a veto at the highest level for high expenditure (relative to the size of the business)
• track and measure orders
• get competitive
• set up a regular process of feedback and consultation between ordering staff and those responsible for managing cash flows. This could be as simple as having finance staff attend production meetings.

Minimise Inventory

Stock Turn is a crucial part of your Cash Flow Gap, and any significant improvement can release a significant amount of cash.

Stock turn can be improved by:

• Performing regular stock-takes, and taking action
• Where possible, take stock on consignment, by arrangement with your suppliers
• Taking a careful look at your supply chain and processes can almost always lead to improvements which reduce the amount of stock needed, and your costs of doing business
• If you’re importing, or can access volume discounts, try spreading the risk by sharing the purchasing with a competitor

Maximise interest free credit

If your accounts payable ledger is relatively large in value, a payment delay of just a few days to key suppliers can make a substantial difference to your cash flows and overall liquidity, for no cost.

Credit cards are darn convenient,

and if used astutely to carry expenses through an interest free period, make financial sense.
They make sense provided the interest-free value is greater than the cost of the annual card subscription fee.

Trim the accounts payable list, and save processing costs

Managing an accounts payable ledger comes at a significant administrative cost which few businesses are aware of, because no effort is made to calculate and attribute the costs.

Try this: Go to your accounts payable ledger today, and identify the bottom 20% of creditors by value, then simply banish the administrative cost of carrying these balances by paying them in full – now.

The small cost to your cash flow will save a bundle of costs. No more verification, reconciliation, authorisation and multiple ledger postings to manage; all gone with one relatively painless and satisfying payment chop.

Have a written budgeted cash flow

and.. forget the mammoth annual budgeting exercise and associated argy-bargy. Your budget should be no more than 4 weeks old.

Introduce and use KPIs (performance benchmarks)

Choose and use appropriate KPIs is important for all aspects of the business, not only in the area of cash flow control.

KPIs should be matched to each employee’s span of authority, and number no more that about 6; any more than that blurs the focus. This is a vital aspect of effective management practice.

Another Source of Cash Flow: Debtor Finance

In recent years Debtor Finance has emerged as an increasingly important technique for supporting small business Cash Flow Hygiene measures. It's a potentially a convenient and cost-effective way to bridge the Cash Flow Gap.