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Tuesday, June 25, 2013

Why Cash is King

You have all heard the expression  “Cash is King”. Did you ever think that it applies to the way you manage your business?  Well read this!

As you manage your business from day-to-day you need liquidity, that is cash.  Cash is required to pay your bills from suppliers to your utilities bills and even your employees.  So, where is this steady flow of cash coming from?  Your customers!

Your accounts receivable levels are important to watch.  Bills are usually collected on a 45 day basis.  Some customers may even pay sooner than that.  Those customers are gold.

You should indicate clearly on your invoices what the terms of payment are.  These are usually 10/20 net 30, meaning that if the bill is paid within 20 days, then the customer is entitled to take a 10% discount on the amount due.  You benefit by collecting on that invoice sooner rather than later and having the money to run your business.

But consider the customer who pays in 60 days.  This customer is costing you money!  You are actually financing this customer to the tune of 36% a year.  That is an incredible financing charge.  Did you ever realize that you were becoming a bank by not collecting on these invoices?  Therefore, it is critical to your cash flow to collect the amounts due you promptly.  Hence, the time value of money:  A dollar today is worth more than a dollar tomorrow.

A good tool to use that can be provided by your bookkeeper is the Aged Accounts Receivable Report.  This report will indicate how long your invoices are outstanding and which ones to watch closely for delinquency.  Your current ratio will be improved with monitoring.

Follow-up calls to customers are important to remind them that the invoice is due.  These calls will also reveal to you whether the order is received in good order and if the customer is happy with the shipment.  Sometimes a customer will not pay on an order that is unsatisfactory because he is a small business and he is just too busy to make that phone call to you; he just holds the goods instead of returning them to you.

If a customer is strapped for cash and cannot pay the total amount of the invoice, then you must ask him to pay something right away.  Making an installment plan with him is beneficial to you and to him.  You must collect something in order to make it easier for you to meet your cash demands, and he has just reduced the amount outstanding on that bill.

Now do you understand why “Cash is King”?

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