Knowhow: Liquidity Concerns | Better cash management is the best way to boost capital
Most small- and medium-sized businesses leave money on the table by not managing their cash cycle with complete efficiency. They fail to put money to work as fast as possible, don't manage their disbursements optimally and expose their companies to unnecessary risk of fraud and errors.
Business owners also tend to approach their bankers about credit with an urgent need to borrow money to buy more equipment or property or another business. Managing their cash cycle isn’t a top priority. But improving inflows and outflows can generate the least expensive form of working capital.
A good banker should be able to show you statistics for the average collection days in your industry to set a benchmark. Your banker should also be able to analyze your cash cycle and map out a plan.
Here are some of the ways your business can collect funds faster and better:
Lock box or remittance services. If your company receives a high volume of incoming payments, a remittance solution can help get your money in the bank faster and streamline your office workflow. Payments are sent to the bank instead of your business office. The bank opens the mail, processes your payments, immediately deposits your funds into your bank account and sends a secure electronic file to your office. Instead of having to manually post hundreds of payments, all your staff has to do is upload a file into your receivables system.
Remote deposit. If someone has to run over the bank and make deposits, maybe that gets done once or twice a week. A remote deposit device is a recent technology that lets you deposit checks daily without leaving your office. You place your checks in the machine for processing. Images of the checks are sent electronically to the bank for next day availability. It beats fighting traffic, standing in line at the bank and unproductive use of employee time
Merchant credit card. Letting your customers pay by credit card lets you to collect money immediately without worrying about bounced checks. Accepting credit cards works well for any size business, whether it has large or small sales volume. The type of credit cards the business accepts and its sales volume determine the fees. With disbursements, you want to pay your vendors on the date the invoice is due — no sooner, no later.
Electronic bill payment. With online banking, you can schedule electronic payments on the due date. This is more efficient than cutting checks and allowing extra time for the vagaries of mail delivery. More major vendors are requiring electronic payment, as it’s more secure and efficient.
Credit-card payments. If your vendors accept credit cards, that gives you at least a month of interest-free float before you pay the bill. It’s also very efficient if you have field representative making payments.
What can better cash management do? Take a $5-million company as an example. Given 250 business days a year, the company takes in $20,000 a day. If it can improve collections by two days, that’s $40,000. In addition to improving its liquidity position, the company that can use that extra money to reduce debt or invest in a short-term earning asset. Better cash management can free up staff to pursue revenue-generating activities and reduce the risk of fraud and errors.
There are many services today that can help businesses of all sizes improve their cash cycle. But beware of any banker who tries to sell you products without taking the time to understand your whole cash cycle, your business and your industry. You’ll want a solution that’s enough but isn’t too much.
John Merrill is president, chief financial designer and chief lending officer at Leominster-based Fidelity Bank. He can be reached at jmerrill@fidelitybankonline.com.
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