Positive cash flow is a necessity for any financially healthy company. It is a key consideration for lending institutions in extending credit, and for potential buyers in assessing a selling company’s value. The good news is that any company can improve its cash flow by implementing effective procedures in these key areas:

Steps to Improve Cash Flow

AREA	DO	DON’T	WHY
Invoices	Send within 48 hours of job completion/shipping.	Hold more than 24 hours for salesperson’s approval or for shipping invoice	Prompt invoicing shortens payment cycle.
	Call 15 days later to confirm invoice receipt and respond to any customer questions.	Assume everything is fine and the customer will pay in full and on time.	The follow up is good customer service. It also diffuses potential non-payment due to product or invoice issues.
Credit Checks	Conduct checks on all new clients. Consider an “up front” payment policy until creditworthiness is established.	Take on new or risky clients without assessing their payment ability and history.	Avoids potential late pay and bad debt issues.
	Review the credit of existing clients periodically.	Assume that everything is status quo with customers.	Financial status changes quickly. Stay informed about all clients.
	Explore various reference sources: banks, trade references, trade associations, credit agencies (Experion, etc.), D&B (though reliability questions) and collection agencies.	Assume credit checks are a waste of time.	Credit check response timelines and information vary greatly. Use those resources that give you the most accurate and timely data.
Collections	Promptly follow up on all outstanding invoices.	Procrastinate!	Timely and persistent follow up is key in successful collections.
	Work with financially struggling clients on an incremental payment schedule for a reasonable time period.	Ignore Past Due accounts, accepting non-payment or no response at all from the customer.	Empathy is fine, but incremental payments show you are serious about collecting the debt.
	Refer uncollectible and non-responsive accounts to a collections agency.	Just give up/ write off the bad debt.	You deserve payment for services rendered. A % is better than nothing.
A/R Aging	Use the date from Shipment as the invoice date and age the A/R accordingly	Use the date the invoice is sent	More accurately measures the time between shipment and payment due date.
	Review all chronically late or non-paying accounts.	Don’t allow A/R to exceed 45 days before some action is taken.	Identifies & weeds out the less desirable customers.

 

Be aware that there are key indicators of cash flow performance that should be monitored.  These include the following ratios commonly used in the Commercial Printing  (manufacturing) Industry:

Key  Health Indicators

INDICATOR	ALL FIRMS	PROFIT LEADERS	COMPUTATION
Days in Accounts Receivable	50	45	# Days from Shipping to Date Invoice is Paid
Current Ratio	1.2	1.6	Current Assets / Current Liabilities
Debt to Equity	3.2	1.5	Total Liabilities / Total Equity
EBITDA as % of Sales	8%	14%	Earnings Before Interest, Taxes, Depreciation and Amortization / Sales
Cash Flow Coverage	1.15 to 1	1.5 to 1	EBITDA / Note Payments (Principal and Interest)

It is important to be proactive in your cash flow management, and actively use the key indicators that can help you monitor your progress. Pursuing a “Cash is King” approach will make your company viable, especially in challenging economic times.

RS&F has extensive experience and success in helping clients build cash flow and reserves. With our help, these clients are able to secure new banking relationships, maximize their value, and have a positive platform in which to grow.

This posting is written in memory of our dear friend and colleague, Joe Becker, who preached “cash is king” throughout his career.