In a previous post, I talked about planning and managing the financial aspects of your business. Included in that was the importance of managing cash flow. I’d like expand on that principle and specifically talk about the concept called “The Cash Gap.” What is the cash gap? Well, it’s simply the number of days between when you have to pay for things in your business and when your customers end up paying you. For example, you might have to buy materials to produce a product or buy inventory to stock your shelves. In addition, you may need to pay for labor well in advance of billing your client. Or you may have to incur costs for licenses or permit fees before you can include them in the cost of a project to your client. And, of course, your customer may take longer to pay your invoice then you would like. So, the time between you laying out the cash, and your client paying you, defines your cash gap.
Theoretically, the time between you paying cash and you receiving cash (the gap) needs to be financed in some way. It could either come from cash in the company or borrowed from some source. By using cash from within your business you limit the possibilities of investing that cash in other areas. And, of course, borrowing money also costs more money in the form of interest. So it behooves every business to reduce the cash gap to as small an interval as possible. As a matter of fact there are some companies who actually have a negative cash gap. That is ideal!
So how do you reduce your cash gap to the fewest number of days? Here are some things you might want to consider implementing in your business. Some of them may work and others may not, depending on the type of business you have. Here are some items to contemplate:
1. Require partial or full deposit on contracts to be paid up front.
2. Finish projects expeditiously so that they can be billed/invoiced.
3. Bill/invoice immediately on completion of job.
4. Consider billing on a more frequent interval, (weekly instead of monthly).
5. Give 15-day terms instead of 30-day terms.
6. Give a one percent or two percent discount for those who pay early.
7. Charge interest for those who pay late.
8. Systematically track over due receivables and actively pursue collections.
9. Reduce inventory by using low inventory trigger points.
10. Buy inventory on consignment and pay only when sold.
11. Negotiate longer payment terms from your vendors.
Try some of these and see what might work for your business. As they say in the bean-counting world – CASH IS KING. So the sooner you collect it, and the slower you dole it, out the closer you’ll get to being king of the hill.