Cash Flow: Revenue (Timing)
June 22, 2009, 9:30 pm
Copyright © 2009 Integrated Profitability TM
As mentioned in “Cash Flow (Intro),” the only way to increase cash flow consistently in the long-run is to ensure that revenues are growing faster than the underlying expenses. For this to happen, “net revenue” is what counts: gross revenue (e.g., sales made) less discounts, processing fees, rebates, returns and anything else that prevents the sale from getting converted into hard cash that you can hold in your hand.
For both revenue and expense, there are two ways to improve cash flow:
● timing changes
● actual changes
The first primarily helps temporarily. The second helps permanently.
For revenue, timing changes help cash flow when the receipt of incoming cash is accelerated; actual changes help when incoming revenue from business activities increases. Focusing on the revenue portion of cash flow, here are some ideas:
Timing:
● Tighten up terms of payment for your sales (examples follow)
● Shorten the amount of time between billing the customer and receiving their payment. Most companies list standard terms on their invoices, stating how long the amount has been outstanding and at what point finance charges kick up (e.g., after 60 days).
● Add finance charges to late paying accounts
● For project work, bring as much of the contract price as close to the signing of the contract as possible. Increase the amount (%) of the contract that is payable upon signing the contract; tie progress payments (%) to specific milestones that are earlier in the project completion cycle. Minimize the amount (%) of the final payment once the project is completed according to whatever metrics/conditions have been agreed when the project was initiated.
● If you aren’t using “in-progress” milestones, implement material ones relevant to the nature of each project.
(Note: before trying to implement the items above, first review the contracts you have with customers. Make sure you have the right to make the changes—if not, update your contracts. Ensure that customers are aware of your policies—you definitely do not want to surprise your customers in a bad way. On the other hand, you do need to get paid, in a fair and timely manner.)
● Encourage use of payment methods that maximize cash flow, which means minimizing the cost of payment. Cash is the cheapest (no costs). Checks have processing steps and charges, as well as payment risk. Credit cards have processing costs.
Once you start analyzing and influencing the payment method used by your customer base, the statement about “timing” only having a temporary impact on cash flow (and ultimate profitability) begins to change. If you are able to migrate a larger portion of your revenue into payment flows that are cheaper, then the cash flow benefits in fact become permanent.
For example, let’s say the average cost to convert sales to cash is 6% because the vast majority of your sales are made via more expensive payment methods. Admittedly, you may have no way to influence clients to use cheaper methods (because their credit cards have fantastic reward systems?). But if you do and the average cost can be reduced to 4% and that level can be maintained, then your cash flow effectively improves by 2% of sales.
More cash flow ideas to follow.
Bill
William A. Stong
Email: william.a.stong@gmail.com
SBF&P # 23
Copyright © 2009 Integrated Profitability TM
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