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Tip of the Day - How To Improve Cash Flow

Filed under: Tip of the Day

Did the check come in today? This is a common question for distributors these days, as they wait for payments from clients on jobs they’ve already paid suppliers for. And maintaining a strong cash-flow position has only gotten trickier since the economic downturn.

“With the way the economy has been, there have been a lot of suppliers in the industry – suppliers we’ve had credit with for four years – now requiring us to prepay,” says Marty Stanchfield, president of Realm Promotions (asi/305338).

To stay one step ahead of costs, Stanchfield has actually transferred these shorter turnaround times from suppliers back onto his clients, tightening payment terms from net 30 to net 15.

“We thought that going to net 15 would lose customers,” says Stanchfield. “But just explaining that we’re in business for them and explaining that we’re just doing this to stay healthy and keep offering our services – we haven’t had any backlash at all.”

When that argument is not compelling enough, Stanchfield says that speaking to the client’s desire to save money is almost always an effective strategy. He’s currently offering a major client a cash discount if their invoice is processed early, so Realm’s check is ready immediately after the order is received.

Jon Lyles, account manager for Fire Sign Inc. (asi/194443), has done something similar, offering a 1% discount to clients who pay net 15 or less. “It gives you a little bit faster cash flow, and that 1% makes a big difference for them,” he says.

Another strategy Lyles uses is to require a partial payment or half-down deposit from clients, which keeps a steadier cash flow coming in. Should a new business opportunity come up, this also allows Fire Sign to be in a better position to approach its local credit union or bank about a loan.

Since getting financing from banks can be a challenge for small businesses right now, another option is to look at accounts receivable financing companies. Promotional Capital (asi/820128) offers both up-front funds to pay suppliers and advance funds on open invoices for clients that may be running late on their payment.

“We’re trying to fill this gap,” says John Herman, president and CEO of Promotional Capital, who was previously a distributor himself. “In our program it’s potentially possible that distributors are not going to have any need for their cash to process an order.”

Herman emphasizes that good cash flow often means ensuring clients have good credit. “It’s imperative that you get credit applications from your clients,” he says. “It used to be very lax, nobody got those, but today a distributor has to get those applications and they’ve got to follow up on those applications and do their own due diligence.” – AP

From Counselor’s April Marketwise.


 

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