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Improving Your Cash Flow Problems

Cash flow issues keeping you up at night? Instead of throwing money at the problem, try strengthening each part of your supply chain.

Cash is the fuel that drives business, and many financial analysts consider the condition of a company's cash flow to be one of the most important indicators of that business's financial health. After all, a well-managed flow of cash--like a strong heart--is usually indicative of a healthy business, while poorly managed cash flow, or a weak heart, can cause problems that affect the entire business.

Unfortunately, companies facing cash flow crunches simply throw money at the problem, which is a temporary solution at best, akin to treating heart disease with drugs alone. And just as heart surgeons encourage their patients to eat well, increase their physical activity and reduce stress, cash flow management requires more than just a financial fix. It requires a holistic approach that focuses on making a company's entire supply chain operate more efficiently. After all, the faster goods move from seller to buyer, the faster sellers can be paid.

It's important to note that a cash flow crisis is usually a symptom of a broader supply chain sickness. Treating this illness requires the attention not only if the CFO but also of the logistics manager, the purchasing department, operations, the tech guys and even the CEO. And while working with a bank to open a line of credit or amending an existing financial instrument can certainly help, the only real way to address a cash flow problem is to take a holistic, long-term view of the issue. Fixing a cash flow problem requires companies to examine and improve the three key flows of commerce: goods, information and funds. Let's take a look at the first key flow.

Follow The Goods

The faster a seller moves goods to a buyer, the faster the buyer will pay for those goods, and that impacts cash flow. Therefore, businesses must ask themselves how they can better improve the speed at which their goods exchange hands. And this goes well beyond the actual transportation of the goods. Rather, it requires an examination of the entire process--from sales all the way through invoicing.

Let's start with sales. It's vitally important for a company's decision-makers--and for small and growing firms, that usually means the owners--to be plugged into the sales process, examining the data from the sales staff on a regular basis. How much was sold yesterday, how much will be sold today, and what about tomorrow? The more accurate this information, the tighter the inventory. And the tighter the inventory, the better the cash flow.

After all, every item that's sitting on a warehouse shelf represents inaccessible capital. Turning that inventory into sales begins to unleash that capital. If the inventory isn't moving, you're not moving cash. On the flip side, you have to be prepared to quickly replace sold or outdated inventory. Robust and accurate sales data ultimately drives inventory levels. Of course, this is sometimes a game of chance, but your chances of having optimal inventory levels increase with the accuracy of our sales data.

Next comes fulfillment. When a customer places an order, what happens behind the scenes? Who handles the fulfillment--that is, moving the goods out of inventory and toward the buyers? Is the pick and pack of the goods and the preparation of the shipment an arduous, manual process that delays shipments from leaving your facility? Or have you integrated technologies that create a streamlined, automated and efficient fulfillment process?

And, of course, transportation decisions are also important. Sometimes the cheapest form of transportation--usually also the slowest--isn't the best choice. Spending more on expedited services can often result in improved reductions in the cash flow cycle.

Use The Information

Your next vital key to good cash flow is information, and for that, you must have visibility of your product shipments. Once your goods leave the dock en route to your buyers, how much visibility do you have regarding the progress each shipment is making? Do you have a tracking number for every package? Did you share the tracking number with the customer? Are you aware that a package was delayed due to weather? While all these questions primarily reside in the operations side of the house, they can also have a major impact on customer service, which in turn can impact cash flow. After all, a customer who feels well treated is more inclined to pay on time--and buy from you again.

In addition to tracking your shipments, using the information you have about each shipment's status and delivery time enables you to put invoices into the hands of your buyers as soon as possible. Once the goods are delivered, does your business receive confirmation that the order's been delivered? And upon receiving that confirmation, do you automatically trigger an invoice? All this information helps to build solid, long-term relationships with your customers while improving cash flow.

Speed The Funds

This is the area where business owners usually look for a quick solution. After all, most of us have heard the laundry list of best practices from a financial perspective on how to improve cash flow. Some of these traditional but important remedies include:

  • Doing customer credit checks. Perform credit checks on all new and non-cash customers. This process can immediately reduce bad debt, since you'll stop offering credit to customers who haven't proved they deserve it.
  • Offering term discounts. To encourage customers to pay on time, consider offering term discounts. For example, if your invoice terms are "net 30/2/10," customer payment is expected in 30 days; however, you're offering the customer a 2 percent discount if payment is made in 10 days.
  • Asking customers to pay by cash or credit card. Rather than sell on term payments, sell on cash or credit card payments. Once you've got the cash in hand, deposit the funds immediately.
  • Charging late fees. Indicate on your invoice when payment is due, and specify the penalty interest for late payment.

These solutions have been and will remain key ingredients in helping to cure cash flow ailments. But they're not the only funds-related prescriptions. Consider these options:

  • C.O.D. (Collect On Delivery). C.O.D. delivers cost savings and processing efficiencies that improve cash flow. This process may seem archaic, but the reality is that you'll be paid faster with C.O.D. than a traditional 30-, 60- or 90-day term agreement.
  • Inventory financing. Have you ever thought about unleashing working capital generated from inventory that traditional banks won't finance, such as inventory you've got housed overseas? What about moving that inventory to a different location that enables those goods to be financed? Unfortunately, many businesses simply throw up their hands in defeat when they learn that overseas inventory can't be financed. But that's giving up too soon. If you take a holistic supply chain approach, you'll realize that realigning your supply chain can enable you to gain economies of scale, reduce inventory expenses and ultimately obtain additional working capital. Most traditional banks are simply focused on the money flow, not the supply chain.
  • Credit insurance. Today's business environment pretty much mandates that small companies go global. But conducting business with trading partners overseas can be risky. Credit insurance can help mitigate the risks by protecting the value of your receivables. By guarding your bottom line against nonpayment--or even slow payment--of invoices, you can breathe easier about your decision to conduct cross-border trade. And credit insurance can be used on a case-by-case basis--for example, with new customers whose payment histories you're unfamiliar with. Once you've established a more solid relationship with them, you can then stop charging them for the credit insurance.

To be successful at cash flow management is to make sure all three flows of commerce--goods, information and funds--are working together to accelerate the movement of money through your supply chain. In all my years in business, I've learned that cash flow can be--and must be--managed wisely, and that better cash flow management goes hand-in-glove with better supply chain management. This will help you create a healthy, strong business.


Bob Bernabucci is president of UPS Capital, the financial services arm of UPS, the world's largest package delivery company and a global leader in supply chain services. Bob has more than 30 years of experience in financial and strategic planning. For more information, please visit www.upscapital.com.

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