Profitability Does Not Guarantee Healthy Cash Flow for Your Business

Unfortunately being profitable on paper does not mean a company has healthy cash flow. In fact, most companies are profitable on paper; they are making more money than they are spending, but are they collecting invoices fast enough for healthy cash flow? That’s the real question and the downfall of many businesses.

As a business professional, you know that paper invoices can’t pay the bills, which is why paying close attention to the status of your accounts receivable department is crucial. But when things seem to be chugging along in the sales department, the data in your accounting system looks good, and the business seems healthy, it can be easy to ignore some of the early signs of a cash flow crisis.

When cash going out begins to creep up higher than cash coming in, everything can very quickly go the opposite direction. When is the last time you checked the status of your accounts receivable? If you find your profitability threatened by slow cash flow, here are a few ways to turn things around before your situation gets out of control.

From an accounts receivable management standpoint:

  • Take precautions and require all new customers, and current customers who ask for credit adjustments, to fill out a credit application form. Here is a business credit application template you can use.
  • If it suits your business model and industry, require customers who make a large order to put down a deposit. Be careful that these policies will not scare off potential customers, are clearly explained, and clearly worded in contracts.
  • Offer discounts for early payment and charge late fees for those who do not pay on time. There are some serious things to consider before implementing these programs though.
  • Consider a dashboard for receivables management which can make it much easier and faster to report on accounts receivable so you know exactly who owes you what, how much is overdue, and what actions have been or need to be taken in order to collect payment from customers.

There are simple things you can do to increase cash flow from the accounts payable side of things too, such as:

  • Take as much time as you can paying your suppliers. If you have 30 days to pay an invoice, don’t pay it in 15 days. An exception to that rule may be if there is a supplier who will give you early payment discounts.
  • Choose your suppliers carefully and do not always choose the supplier with the lowest price. In some cases, a supplier with more flexible payment terms or who is willing to give you more credit can be a better choice in the long run.

We’ve only begun to touch the surface of the many ways you can increase cash flow in your business by paying closer attention to accounts receivable and following business credit management best practices. Learn more in our Resource Library where you can download more educational content that digs much deeper into the issues at hand.

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