One of the things I do for clients is to help them evaluate cash flow and some basic profitability and efficiency data points. This identifies areas in which I can provide more help.
Generally, to get clarity, I spread out months of financial statements. Recently, I did this for a client, using 24 months of statements. I then apply a basic template to get to the level of detail we needed. By doing this early in the relationship/project, it helped me understand their business industry and peculiarities.
This company had $18M in revenue. We discussed the income statement efficient and asset turnover on the balance sheet. The “days sales outstanding” calculation indicated that the accounts receivable turnover was averaging 48 days.
I applied a calculation I typically use:
Last three months of sales divided by 90 / total accounts receivable to calculate the average number of days from when sales turn into cash. (You can invert the calculation to determine what your accounts receivable would be with a certain number of days.)
How does this help?
In this case, we looked at the possible results if the company could reduce the turnaround average by eight days.
An extra $350,000 of cash in the bank.
Obviously, this is an appealing outcome, so we brainstormed ways to improve accounts receivable turnover. Here’s what we came up with:
- Doing a better job upfront to ensure customers understand your credit policies
- Proactively calling customers before the invoice is due to ensure there are no problems with their order (making it easier for them to pay on time.)
- Build a better relationship with the customer’s accounts payable department. People will prioritize payments to people they have a positive relationship with
- Provide clearer and more timely invoices
- Offer easier payment options
Maybe you don’t think about how everyday processes affect your cash flow – but they do. Take the time to review and think over regular tasks and workflows like this. You may be surprised where you can improve a process – and the bottom line.