The Question: Orders and sales are growing at a great pace, but my business’s bank account is lagging behind. I need to improve my cash flow. Where should I start?
The Advice: While rapid growth is a great position to be in, it has its challenges. You’ve identified a scenario that appears to be a contradiction at first. Shouldn’t it be “my sales are growing briskly and my bank account is growing quickly too?”
Time is not on your side
Let me assume your business sells products to other businesses. You need to invest in inventory ahead of the order or just-in-time once the order is placed. You’re starting with a cash outflow.
Once your customer has received the items on the order and has been invoiced, your customer likely doesn’t need to pay until a later date based on the terms of your agreement. You’ve extended credit to your customer, which delays the cash inflow.
Accelerated sales can result in a large amount of money tied up in unpaid invoices. If the order-to-cash process is not properly managed, a business can be looking at a cash crunch…or as this Forbes article on increasing cash flow puts it, “literally grow[ing] themselves into bankruptcy.”
Speed up the order-to-cash process
Let’s focus on the order-to-cash process, although you may have opportunities for cash flow improvements in your procure-to-pay process as well.
In addition to collections, as mentioned in the Forbes article, three additional areas you should initially investigate are:
- Invoice generation
- Credit checking
- Order fulfillment
An invoice is the signal for your customer to pay you. Are you giving them reasons to delay?
First, measure how long it takes to send an invoice after goods have been shipped. You may be assuming it happens immediately. With manual processes that might not be the case.
Second, make sure you are creating accurate invoices. Invoice disputes and exceptions will slow down payments and increase the chance of short pays. Accurate invoicing also improves your customer’s experience. You don’t want their last impression to be a discussion about why they were billed twice for the same product.
Retyping sales information in your financial package can introduce problems. Automating and connecting the sales, inventory, fulfillment and finance steps by using integrated software can both speed up invoicing and reduce errors.
While write-offs are expected when you have receivables, you want to minimize them. Do you have a process for extending credit to your customers?
This process can start before a prospect becomes a customer. Determine how you will do credit scoring and process applications for new accounts. Ideally, the tools you use should enable you to monitor risk changes in accounts and the entire accounts receivable portfolio.
In addition, look for ways customers might get around your credit policies. Airfreight 2100, a logistics company, found multiple IT systems and manual processes were allowing customers to open several credit accounts. By improving credit policies and fixing processes, they reduced overdue accounts receivable by 20%.
We don’t want to forget about the word ‘order’ in the order-to-cash process. Are you delivering orders on-time and in-full?
Fulfilling an order on time begins when the order is placed. Your sales order application should start with the quantity of the item in stock in your inventory. To this, it adds incoming deliveries or items to be made through your production process. Next, it should determine if these items are committed to another customer or can be delivered to the customer placing the order. If the checks are passed, it can then commit the quantity and date of delivery.
By promising the availability of items and then following through with on-time and in-full delivery, you build trust with your customers. Not only will this reduce questions during invoicing, you can confidently make changes that benefit both your business and theirs. Yellow Box, a designer of fashion footwear, improved its fulfillment accuracy by 100%. Improved order management and delivery is allowing them to offer customer-specific pricing and discounts to foster stronger relationships.
Where to start
Begin with one of areas above and evaluate how well your process is working. For a comprehensive perspective, you can speak with your customers about their experience interacting with your business. Then look for opportunities for improvement within the current process you have in place.
As you continue to grow, you may need to consider new software to more fully automate your order-to-cash process and make it easily repeatable. Improvements can include changes that aren’t feasible when the steps are done manually.
The Small Business Coach
This week’s Small Business Coach is Todd Idler, Senior Director of Small and Midsize Enterprises (SME) Marketing Programs for SAP. Todd takes his passion from growing up in a family business into his role. Follow Todd: @toddidler
Today’s question on The Small Business Coach is based on a common business dilemma. If you have a question about how to run your small business better, smarter, and faster – send it in to The Small Business Coach using the form below or email it to firstname.lastname@example.org. Be sure to follow SAP’s latest news and events for small business on Facebook and Twitter @SAP4SmallBiz.
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