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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.

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Cash is the fuel that drives business, and many financialanalysts consider the condition of a company's cash flow to beone of the most important indicators of that business'sfinancial health. After all, a well-managed flow of cash--like astrong heart--is usually indicative of a healthy business, whilepoorly managed cash flow, or a weak heart, can cause problems thataffect the entire business.

Unfortunately, companies facing cash flow crunches simply throwmoney at the problem, which is a temporary solution at best, akinto treating heart disease with drugs alone. And just as heartsurgeons encourage their patients to eat well, increase theirphysical activity and reduce stress, cash flow management requiresmore than just a financial fix. It requires a holistic approachthat focuses on making a company's entire supply chain operatemore efficiently. After all, the faster goods move from seller tobuyer, the faster sellers can be paid.

It's important to note that a cash flow crisis is usually asymptom of a broader supply chain sickness. Treating this illnessrequires the attention not only if the CFO but also of thelogistics manager, the purchasing department, operations, the techguys and even the CEO. And while working with a bank to open a lineof credit or amending an existing financial instrument cancertainly help, the only real way to address a cash flow problem isto take a holistic, long-term view of the issue. Fixing a cash flowproblem requires companies to examine and improve the three keyflows of commerce: goods, information and funds. Let's take alook at the first key flow.

Follow The Goods

The faster a seller moves goods to a buyer, the faster the buyerwill pay for those goods, and that impacts cash flow. Therefore,businesses must ask themselves how they can better improve thespeed at which their goods exchange hands. And this goes wellbeyond the actual transportation of the goods. Rather, it requiresan examination of the entire process--from sales all the waythrough invoicing.

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

After all, every item that's sitting on a warehouse shelfrepresents inaccessible capital. Turning that inventory into salesbegins to unleash that capital. If the inventory isn't moving,you're not moving cash. On the flip side, you have to beprepared to quickly replace sold or outdated inventory. Robust andaccurate sales data ultimately drives inventory levels. Of course,this is sometimes a game of chance, but your chances of havingoptimal inventory levels increase with the accuracy of our salesdata.

Next comes fulfillment. When a customer places an order, whathappens behind the scenes? Who handles the fulfillment--that is,moving the goods out of inventory and toward the buyers? Is thepick and pack of the goods and the preparation of the shipment anarduous, manual process that delays shipments from leaving yourfacility? Or have you integrated technologies that create astreamlined, automated and efficient fulfillment process?

And, of course, transportation decisions are also important.Sometimes the cheapest form of transportation--usually also theslowest--isn't the best choice. Spending more on expeditedservices can often result in improved reductions in the cash flowcycle.

Use The Information

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

In addition to tracking your shipments, using the informationyou have about each shipment's status and delivery time enablesyou to put invoices into the hands of your buyers as soon aspossible. Once the goods are delivered, does your business receiveconfirmation that the order's been delivered? And uponreceiving that confirmation, do you automatically trigger aninvoice? All this information helps to build solid, long-termrelationships with your customers while improving cash flow.

Speed The Funds

This is the area where business owners usually look for a quicksolution. After all, most of us have heard the laundry list of bestpractices 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 onall new and non-cash customers. This process can immediately reducebad debt, since you'll stop offering credit to customers whohaven't proved they deserve it.
  • Offering term discounts. To encourage customers to payon time, consider offering term discounts. For example, if yourinvoice terms are "net 30/2/10," customer payment isexpected in 30 days; however, you're offering the customer a 2percent discount if payment is made in 10 days.
  • Asking customers to pay by cash or credit card. Ratherthan sell on term payments, sell on cash or credit card payments.Once you've got the cash in hand, deposit the fundsimmediately.
  • Charging late fees. Indicate on your invoice whenpayment is due, and specify the penalty interest for latepayment.

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

  • C.O.D. (Collect On Delivery). C.O.D. delivers costsavings and processing efficiencies that improve cash flow. Thisprocess may seem archaic, but the reality is that you'll bepaid faster with C.O.D. than a traditional 30-, 60- or 90-day termagreement.
  • Inventory financing. Have you ever thought aboutunleashing working capital generated from inventory thattraditional banks won't finance, such as inventory you'vegot housed overseas? What about moving that inventory to adifferent location that enables those goods to be financed?Unfortunately, many businesses simply throw up their hands indefeat when they learn that overseas inventory can't befinanced. But that's giving up too soon. If you take a holisticsupply chain approach, you'll realize that realigning yoursupply chain can enable you to gain economies of scale, reduceinventory expenses and ultimately obtain additional workingcapital. Most traditional banks are simply focused on the moneyflow, not the supply chain.
  • Credit insurance. Today's business environmentpretty much mandates that small companies go global. But conductingbusiness with trading partners overseas can be risky. Creditinsurance can help mitigate the risks by protecting the value ofyour receivables. By guarding your bottom line againstnonpayment--or even slow payment--of invoices, you can breatheeasier about your decision to conduct cross-border trade. Andcredit insurance can be used on a case-by-case basis--for example,with new customers whose payment histories you're unfamiliarwith. Once you've established a more solid relationship withthem, you can then stop charging them for the creditinsurance.

To be successful at cash flow management is to make sure allthree flows of commerce--goods, information and funds--are workingtogether to accelerate the movement of money through your supplychain. In all my years in business, I've learned that cash flowcan be--and must be--managed wisely, and that better cash flowmanagement 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 financialservices arm of UPS, the world's largest package deliverycompany and a global leader in supply chain services. Bob has morethan 30 years of experience in financial and strategic planning.For more information, please visit www.upscapital.com.

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