Wednesday, March 31, 2010
Is your business behind the money curve?
Does your business have a nice sized A/R but little money to show for it? Is your company accounting manager always ducking collection calls? You may be behind the money curve. Here’s how it happens:
You may have a few large customers that name their own credit terms or just pay slow. The key ratio that every business owner should know is days sales outstanding or DSO. DSO measures how long it takes for an invoice to be turned into cash. Your accounting manager can calculate this number for you or you can find the formula here:
The idea as the business owner is to turn your receivable into cash as fast as possible, the larger the DSO number the longer it takes. All business have creditors and suppliers and the problem is when your business pays out faster than your finance department can collect the receivable, in consumer terms, you’re upside down. How can you speed up the process?
1) Motivate the collection staff-If you really want to know where the problems are with your business, take a trip to the credit/collection department. Good credit people will usually have a solution as well. I know it’s not in vogue in these economic times, but offering a bonus for cash collected is not a bad idea. In fact, it’s a very good idea.
2) Offer a cash discount-This is giving some of your profit away but it motivates your slower paying customers to pay, it may be worth the 1 or 2 percent discount.
3) Factor your invoices-Selling your invoices to a factor also takes away profit, but you get your cash over night. Factors are great financial advisors since they are in “the money game” every day.
4) Transfer some of your risk to someone else-This strategy is probably for a medium business. Some business set up a dealership network to service certain accounts. They sell their product to a middle main who then deals with the slow paying account. The middle man then charges a premium for the product or service because he knows he’s going to wait to be paid.
5) Try to get some of your money upfront as a down payment (medium to large companies will resists this strategy so be prepared)
6) Take credit card payments-this is another strategy to get paid in a very short time, just make sure you read the agreement very carefully.
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