Payments consulting firms can help with policy development, compliance, and risk management. They can also educate your team and help you navigate the innovations shaping this industry.
Even profitable companies can run into trouble when their debts (accounts payable) are due before they have enough cash from sales to pay them. Here are some tips to boost your firm’s cash flow.
Focus on Accounts Receivable
One of the most common problems companies face is needing more cash to pay their bills. This can happen even when a company is profitable on paper or has low debt and high current assets. To avoid this, companies should optimize their accounts receivable and ensure payments are received promptly. This can be done by providing that invoices are sent out on time and that follow-up calls are made if payments still need to be accepted. It is also helpful to offer e-payment options and payment plans to make it easier for clients to pay.
In addition, companies should optimize their payment terms with suppliers. This can be done by negotiating lower prices with suppliers or by attempting to group purchases to increase purchasing power and haggle better rates. Another option is a purchasing management software solution that matches purchase orders and invoices automatically. This can reduce costs and improve visibility into the procure-to-pay cycle, which can help to improve cash flow.
Lastly, it is essential to monitor expenses regularly. This can be done by analyzing past spending trends or by looking at cost-saving measures that may be available. For example, renting a home office instead of larger office space and reducing utility bills might be possible during the pandemic.
Focus on Accounts Payable
One of the most important aspects of cash flow optimization is ensuring your company has enough money to pay its bills. More is needed to focus on boosting revenue or improving accounts receivable; your business needs more cash coming in than going out. Otherwise, it’ll struggle to stay alive.
A finance department can improve its operations through several strategies. For instance, it can speed up its processes by introducing automation and digitization. Moreover, it can reduce costs by taking advantage of supplier discounts and negotiating more favorable terms in payments consulting. These improvements can help reach corporate financial targets more efficiently and avoid working capital constraints.
The same kind of attention should also be given to accounts payable. This includes focusing on the invoice processing timeline and optimizing supplier payment arrangements. Ultimately, it’s all about managing the difference between the money that comes in and goes out, so working capital optimization should be a priority for every organization.
For example, you can make it easier for clients to pay their invoices by offering e-checks and credit card payments. This can make the process faster and more convenient for them and give you an extra boost in cash flow by removing the need to process checks or pay transaction fees.
Focus on Inventory
Streamlining the inventory management process and working capital policies is one of the best ways to improve cash flow. A 1-week reduction in lead time can free up millions of dollars in savings for your company. This includes reducing unnecessary product lines and using the 80/20 rule to focus on the highest dollar-value items in your product mix.
Managing cash flow involves tracking finances accurately, maintaining minimum cash requirements, forecasting future payments, and keeping available funds from piling up. It also analyzes performance, budgeting, and planning to help your business grow and prosper.
For example, if Tex’s clients paid him with credit cards instead of checks, he could reduce his inventory of those novelty hats by 20% without affecting revenue. This is because credit card payments require less work for the client, which results in faster and cheaper processing fees.
Other ways to improve cash flow are adjusting monthly expenses, negotiating payment terms with vendors, and focusing on marketing strategies to increase new customers. These strategies can help improve a company’s financial health by reducing the amount of money it spends on operating costs, debt repayment, and investments. In addition, they can help ensure enough cash on hand to pay bills and support the company’s growth strategy. If not, businesses are at risk of bankruptcy, no matter how profitable they are on paper.
Focus on Expenses
Whether short-term or long-term, expenses must be trimmed to ensure that cash coming in matches or exceeds the cash going out. A clear spending picture allows for more precise budgeting and planning, staying ahead of creditors, and preparing for growth opportunities.
During difficult economic times, it is even more important for professional services firms to maintain positive cash flow and put good practices in place to preserve working capital well into the future.
The key to optimizing cash flow is ensuring that the money from accounts receivable and payables covers or exceeds the amount going out. To do this, all departments need to be aligned. For example, contract terms should include progress payments following reasonable milestones that allow clients to feel financially protected while giving the firm more time to turn work into cash.
Similarly, it makes sense to offer clients the ability to pay via credit card instead of cash, which can reduce interest costs and provide more time between paying vendors and receiving outstanding invoices. Direct ways to cut expenses include reducing unnecessary expenses, such as extra office space or expensive employee phone plans. Another way to cut costs is negotiating with suppliers for lower prices or flexible payment terms. Payments Consulting can help you achieve these goals by improving transparency, refining sales processes, and streamlining core operations.