Easy ways to keep the business liquid at all times

Easy ways to keep the business liquid at all times
By Henry C. Ong
from Entrepreneur Philippines Magazine, May 2009

In business, cash is king, so you need a proactive cash management system to maintain your cash flow

During this interesting time when business is not so good, it is important to be extra conscious of your cash flow. Your ability to generate cash flow is critical not only to the profitability of your business but also to your very own survival. You may have the best product in the industry or the best people in your sales team, but without a proactive cash management system, you run the risk of losing your business when crunch time comes.

To keep the business liquid at all times, you should build up your cash reserves equivalent to at least six months of operating expenses to maintain some degree of operating leverage. This way, you will have sufficient cash to sustain the business through months of losses. If your current cash balance is not sufficient to meet this requirement, examine your sources of cash.

How much of your sales is on credit and how much is on cash basis? Consider shifting your sales policy towards favoring cash payments. If this is not possible, shorten your cash collection period by limiting the credit terms you give customers as well as by limiting the amount of receivables you extend. For example, you can limit the granting of 90-day credit only to selected clients. Let's say you have 20 clients with a total exposure of P750,000 that's payable to you in 90 days. If you cut the number of such clients to 10, you would have collected P375,000 on the average sooner.

In the same way, lower the amount of receivables you intend to finance, asking the client to pay the balance in cash. Let's say the amount of accounts receivable you normally extend to clients is P900,000. If you cut this amount down to half by requiring your clients to give a down payment, you would have collected P450,000. Of course, you may need to give discounts to clients to make your terms more attractive. You have to study the costs and benefits of implementing this kind of policy.

Remember that your objective is to get your clients to pay as soon as possible. When you are able to collect cash for every sale that you generate, you minimize the risk of not being paid at all. Having bad debts not only affects your profitability but also eats up your working capital, thus weakening your capability to generate higher sales in the future.

In times like this, always remember that cash is king. When you have cash, you will not only be able to sustain your business but also acquire opportunities to strengthen your position in the market.

What if extending credit is unavoidable?
If you really need to extend credit to your customers so as to generate sales, you need to establish a set of credit control procedures.

An important procedure is to subject all new clients to strict credit check. Get answers to the following questions, among others:
Does the client have any history of not paying his suppliers in the past?
Is the client highly recommended by a reliable person?
What is the nature of the client's business?

For existing clients who owe you money, set up a schedule when the accounts receivable become due for collection.
Avoid delaying your collection just because you know the client would pay you anyway.
Have a system to alert you the moment an account becomes overdue, whether by 15 or 30 days or so on. This way, you can easily identify clients you need to prioritize for collection.

Decide how insistent your approach should be in going after non-paying clients. If clients decide not to pay you at all, you also must have a ready plan on what to do next.

Streamline your cash flow by cushioning the impact of lower sales brought about by economic downturn by doing the following:

Protecting your income by lowering your expenses.
Examining your expenses and try to see what items you can possibly cut. Examples are advertising expense, additional staff, and representation expenses.
Monitoring your expenses by preparing a budget and comparing it with actual costs.
Making sure the budget targets you set are realistic.