The North Bay Business Journal, a publication of the New York Times, is a weekly business newspaper which covers the North Bay area of San Francisco – from the Golden Gate bridge north, including the Wine Country of Sonoma and Napa counties.

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Article published – December 15, 2008

BUILDING A BUSINESS: Surprise: ‘Cash is king; here’s how to keep it flowing

by Lary Kirchenbauer

“Money’s a horrid thing to follow but a charming thing to meet.” – Henry James

There is probably no more trite but compelling phrase in the business lexicon these days than “Cash is King.” What does it mean?

Many of the key elements of a sound cash-management system deal with accounts receivable. Since every dollar of accounts receivable equals a dollar of cash invested on your balance sheet, it stands to reason that the quicker those receivables are collected, the more cash is available for additional investment. So, what are some of the key concepts that are part of a sound credit and collection policy?

Timely billing is critical. In many companies, days and sometimes weeks lapse between the shipment and invoice date. Take a look at your billing practices and make certain that once you have fulfilled your delivery obligation, you issue an invoice as quickly as possible.

Also, consider how to deliver that invoice to your client electronically rather than by snail mail. Although it may not be possible to get every customer to accept electronic invoicing, many of them will appreciate an opportunity to reduce their own paperwork.

Thoroughly review your credit policy. This challenging economic environment is a good time to update the credit terms for all of your customers. Switching to credit card payment for smaller accounts, for example, will reduce your credit exposure and accelerate the collection of smaller balances which are always the most expensive to collect. Likewise, make sure your remaining customers still qualify for their credit line and make adjustments accordingly.

Don’t just collect past due balances – prevent them. Throughout your process, set the expectation of prompt payment. Consider a soft, promotional follow up within 10 days or so of the invoice to make sure that the customer received the invoice and has all the documentation they require for processing. This prevents one of the oldest dodges in the collection business – “We can’t find a copy of your invoice.” Consider ways to send pleasant reminder notices to your customers, maybe a simple statement before the invoices are due to remind them, “If you need any assistance in securing the appropriate documentation, please let us know.”

Once an invoice becomes past due, apply your collection efforts immediately. Obviously, you have to manage this in a customer-friendly manner, but there are many ways in which you can gently remind your customer what they owe. It’s surprisingly common for companies to pay little attention to receivables until they are 30 or 60 days past due, perhaps thinking that until then, there’s no real problem. This often results because companies are focused on collectibility instead of cash flow. When necessary, it will be much easier to work out modified payment terms early instead of making concessions after the invoices are several months past due.

You can be dead certain that if your customer recognizes they can take an extra 30 or 60 days, they’ll take it every time.

From experienced hands over the years, I learned the proven adage that “the wheel that squeaks gets the grease,” and it’s true that a customer is more likely to pay you to avoid the continuing dunning efforts. In an ideal collection process, your customer knows that if they didn’t pay their bill yesterday, a reminder from you will be waiting for them today when they pick up their mail. While the “dunning,” or collection, process can be an unpleasant one, if you’ve delivered your product or service, you have every right to ask your customer to fulfill their end of the bargain Ö politely, of course.

Be vigilant about unearned discounts. When you offer discount terms, say 2 percent/net 30, many customers get in the habit of taking the 2 percent discount regardless of whether they pay on time. If you issue a lot of small invoices, the amount of that 2 percent will be small and often ignored. Don’t let those pennies disappear out the back door.

Make deposits on a timely basis. It amazes me how long some companies will hold checks from customers and often make only periodic deposits. Make daily deposits to not only enhance your cash flow, but to also to verify more quickly that the checks received represent collected funds. The quicker you uncover any such problems, the faster you’ll be able to resolve them.

Finally, don’t overlook outsourcing the collection of troubled accounts. Collection professionals today are able to collect much older balances. If you have exhausted your collection efforts, go through the American Collectors Association to find a qualified firm to apply a focused collection effort rather than warehousing old, unpaid accounts. Agencies almost always work on a commission so there’s little cost to getting their help.

The key is to stay on top of your receivables throughout the entire process from credit approval to invoicing, and from collection through payment. Eternal vigilance must be the hallmark for your credit and collection process and can accelerate your cash flow in significant ways.

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Lary Kirchenbauer is the president of Exkalibur Advisors Inc., providing practical business strategies for family and other privately owned businesses in the middle market. He works closely with senior executives and their businesses to accelerate their growth and improve personal and professional performance. Please visit his blog, The Daily Bull, at www.exkalibur.com and look for other helpful counsel under the category, “Surviving the Storm.”

Seeking the best ideas for these turbulent times

This column and the Business Journal are launching a feature entitled Surviving the Storm. Its express purpose is to solicit your best ideas for revenue enhancement, cost reduction and general productivity improvement to share with other readers and business leaders during this demanding economic climate. Please e-mail ideas to survivingthestorm@exkalibur.com

We will report back on your ideas.

Ideas can be small – reduce the number of fax lines in a digital world that doesn’t require them, cancel the catered lunch every Friday, clean our own windows, etc., but anything is fair game.

We will either attribute them to you by name, if you wish, or will provide them anonymously. We look forward to hearing from you.