Across my many engagements I have encountered three distinct levels among entrepreneurs when it comes to reviewing and understanding accounts receivable, accounts payable, and cash flow statements.
Level 1: Customer has a good understanding of what his business is owed (total amount), and in most cases when the amounts are owed (aging).
Level 2: Customer also has a good understanding of what is payable (total amount), and in most cases when (aging).
Level 3: Cash Flow Statement (which includes changes in A/R and A/P balances) is reviewed at least weekly and every time you need to make a decision.
For most business owners, getting to Level 1 is not that difficult—the issue is that they almost always stay right at that level. This stagnation is risky. A lack of attention to payables can result in a loss of the key relationships you need to ensure that you can always supply your product. And in extreme cases, mishandling your payables can result in lawsuits.
And is there any worse feeling than when a company unexpectedly runs out of cash and can’t make payroll or pay a key vendor to ship an order? There are too many painful examples.
In my practice I stress and reinforce that companies quickly and competently must get to Level 3 because, once you're there, that level of commitment to reviewing statements allows a business owner to make a perfect numbers-driven decision every time and, most importantly, understand the effects those decisions have on cash.
Here are three tips for managing your cash flow
Remember that your A/R is your largest piggy bank, which can be tapped as needed. Know which customers can pay you more quickly if you need it. It can often be cheaper and easier to offer prompt payment discounts (especially with your best relationships) than to tap bank credit facilities or other debt instruments.
If you are in quick need of cash, or of holding onto cash, your A/P is your safety net. In most cases you can stretch out payments to vendors ethically and within your personal financial value system if you are in constant communication and forthright in your request. That being said, you must never ever stretch out payables to those companies related to sourcing, producing or selling your product.
Your cash flow statement (and your accountant) loves consistency and simplicity. One way to achieve consistency is to offer similar terms to both your vendors and your creditors.
Odds are, if you are reviewing your statements frequently, and you follow these tips, you will probably never run out of cash because you will know with enough forethought how you may use your A/R and A/P to manage through any challenge.